Comtrade Yearly report - Karvy Commodities · 2011-02-07 · The objective of this comprehensive report is to enrich your understanding of commodities market and facilitate investing

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It gives me great pleasure to introduce Karvy Comtrade’s Annual Commodity Report

2011, which extensively covers the developments in the global commodity markets,

with particular emphasis on India. Indian commodity derivatives market witnessed a

stupendous growth in 2010. All the exchanges—national and regional—put together

clocked a turnover of ̀ 96.57 trillion (till �irst fortnight of December 2010) in CY 2010,

registering a growth of 37% Y/Y. Improvement in forward contract regulation—

which is awaiting government’s amendment—might act a booster for the market.

Amendment to FCRA in under progress and is likely to be passed in Parliament very

soon. With the amendment, the commodities market will become stronger in terms of

control, participation and we can expect more instruments for trading like indices and options.

With commodity markets staging a strong growth in 2010, we have made eff orts to provide you with a

thorough analysis of key commodities in this report. For instance, we have highlighted the major events and

triggers that impacted the performance of commodities, positively or negatively, in 2010. Moreover, based on

inherent fundamentals and supported by technical studies, we have endeavoured to give you an outlook for

key commodities in 2011. The outlook for a particular commodity is a function of its intrinsic fundamentals

and the current global scenario. In regard to agricultural commodities, the outlook has also been driven by a

visit to the respective physical markets.

Broadly speaking, the report covers energy, base metals, precious metals and agri commodities, besides

providing an extensive global economic perspective. The objective of this comprehensive report is to enrich

your understanding of commodities market and facilitate investing in 2011.

This report could not have happened without the monumental eff orts put in by our research team. The

contribution of each of our research analysts has been immense towards the development of this report. I

would like to express my heartfelt gratitude to them. Last but not least, I would like to thank our production

team, comprising Mr. Vijayendra Kumar, for their dedicated eff ort in making this report as user-friendly as

possible.

Meanwhile, here’s wishing all our dear readers a Wonderful and Prosperous New Year from all of us here at

KARVY COMTRADE LTD.!! Happy investing!!!

Preface

Sushil SinhaBusiness Head,

Karvy Comtrade Ltd.

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Contents

Best picks: 2011 5

Economic review: Global economy—Divergence continue to remain 7

Precious metals: Gold—To continue its secular bull run 11

Base metals: Strong year ahead 19

Aluminium: Surplus to narrow down 21

Copper: Supply to remain tight 23

Lead: Strong demand from automobile sector 25

Nickel: Balanced market to support prices 27

Zinc: To track other base metals 29

Energy: Crude oil—Likely to trade in 3-digit 31

Agri commodities: Eventful monsoon 2010 35

Oil and Oilseeds: Destined to be bullish 38

Spices: Carving individual path 47

Pulses- Showers soak the pulses prices 57

Gainers and losers 62

DisclaimerThe report contains the opinions of the author that are not to be construed as investment advice. The author, directors and other employees of

Karvy, and its af�iliates, cannot be held responsible for the accuracy of the information presented herein or for the results of the positions taken

based on the opinions expressed above. The above-mentioned opinions are based on the information which is believed to be accurate and no

assurance can be given for the accuracy of this information. There is risk of loss in trading in derivatives. The author, directors and other employees

of Karvy and its af�iliates cannot be held responsible for any losses in trading.

Commodity derivatives trading involve substantial risk. The valuation of the underlying may �luctuate, and as a result, clients may lose their entire

original investment. In no event should the content of this research report be construed as an express or an implied promise, guarantee or implication

by, or from, Karvy Comtrade that you will pro�it or that losses can, or will be, limited in any manner whatsoever. Past results are no indication of future

performance. The information provided in this report is intended solely for informative purposes and is obtained from sources believed to be reliable.

Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

We do not off er any sort of portfolio advisory, portfolio management, or investment advisory services. The reports are only for information purposes

and not to be construed as investment advice.

For a detailed disclaimer please go to following URLs:

http://www.karvycomtrade.com/disclaimer.asp; http://www.karvycomtrade.com/riskDisclaimer.asp

Note: Data in all tables and �igures is taken till 10th December 2010.

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Best picks: 2011

Gold COMEX ($/Oz) Buy at 1300-1320 TP 1430 then 1500 SL 1240

Gold MCX (`/10 gram) Buy at 19500-19900 TP 20900 then 21400 SL 18300

Silver COMEX ($/Oz) Buy at 24-26 targeting 32.5 then 35 SL 19 (6-9 Months)

Silver MCX (`/Kg) Buy at 40000-41000 TP 46000 then 50000 SL 35800 (6-9 Months)

Crude oil NYMEX ($/bbl)

Crude oil MCX (`/bbl)

Buy at $82-86 TP $100 then $112 SL $68

Buy at 3750-3800 TP 4430 then 4700 SL 3400

Copper LME ($/MT) Buy at 8450-8700 TP 10000 then 10900 SL 7200

Copper MCX (`/Kg) Buy at 405-410 TP 470 then 490 SL 370

Lead LME ($/MT) Buy at 2200-2340 TP 2900 then 3120 SL 1740

Lead MCX (`/Kg) Buy at 103-105 TP 120 then 129 SL 92

Nickel LME ($/MT) Buy at 22900-23400 TP 27500 then 32400 SL 17200

Nickel MCX (`/Kg) Buy X lot at 1050-1070, Y lot at 940-970 TP 1340 then 1400 SL 820

Soybean CBOT(¢/bushel) Buy in the range 1230-1260 TP 1490 then 1600 SL 1100

Soybean NCDEX (`/100 Kg) Buy at 2150-2250 TP 2720 then 2900 SL 1870

Soy Oil CBOT (¢/lb) Buy at 49-51 TP 62 then 68 SL 40

Soy Oil NCDEX/MCX (`/10 Kg) Buy at 560-580 TP 695 then 730 SL 500

Pepper NCDEX (`/100 Kg) Buy at 17500-18000 TP 23000 then 26000 SL 14500

Chana NCDEX (`/100 Kg) Buy at 2400-2460 TP 2800 then 3000 SL 2000

Guar Seed (`/100 Kg) Buy at 2300-2325 TP 2740 then 3040 SL 1900

Turmeric NCDEX (`/100 Kg) Buy at 8400-8800 TP 11700 then 14200 SL 6800

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Research team: Karvy Comtrade Ltd.

Aurobiinda Prasad GayanResearch Head

Veeresh HiremathChief Analyst

Shikha MittalFundamental Analyst – Spices

Smitarani TripathiFundamental Analyst – Energy

Sundeep JainFundamental Analyst – Metals

Nikky JoshiTechnical Analyst

Madhu NagarajTechnical Analyst

Vimala ReddyFundamental Analyst – Cereals & Pulses

Sandeepkumar KTechnical Analyst

Srikanth RayipatiTechnical Analyst

For more queries contact: 040-23388707; Mail: [email protected]

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Global economic round-up

The global economy experienced continued recovery in the year 2010, though fragile in industrial nations and

smart in emerging economies. This recovery was resulted in by sustained �iscal expansion in the west while

emerging nations—primarily India and China—took a step further as they realized their respective economies

are facing overheating challenges, mainly higher in�lation. However, the recovery could have been much stronger,

had the eurozone not been thwarted by intermittent sovereign issues. Sovereignty of many European peripheral

nations was in danger throughout the year. Some of them were off ered bailout; still it was distant probability

that these issues may be completely resolved. After multi-billion dollar bailouts to Greece and Ireland, Investors

are now shifting their attention to Portugal and Spain who, investors think, may also ask for similar help to

withstand their �iscal problems. In further developments, countries were seen engaged into currency war

and challenging market-determined exchange rate in an eff ort to revive their export-driven domestic growth.

Frequent meetings by the Group of 20 �inance ministers failed to bring some concrete measures on the table. This

made bi-lateral ties little bitter amid situations when political and economic worries were already disturbing

the economic recovery.

Major developments

The year started off with severe debt problems in Europe, which persisted throughout the �irst half i.e. till June.

When the worse was on its peak, European Central Bank carried out a “Stress Test” on European banks to gauge

their resistance during �inancial crisis. These debt concerns calmed down only after the stress test results were

declared satisfactory and it was noticed that only 7 out of 90 odd banks failed the test and may end up with

capital shortfall in case of adverse scenario. Later, U.S. Quantitative Easing II gave investors further reason to talk

about. This topic remained in limelight for over two months which �inally ended up with a formal announcement

of $600 billion—the amount that will be invested in the U.S. Treasuries by the Fed. Soon after that, European debt

concerns again stood up with Ireland getting a bailout of $113 billion from EU and the IMF. Portugal and Spain

may be next in line to seek �inancial assistance in an eff ort to avoid any �iscal instability. Simultaneously, geo-

political tensions between two Korean countries also rattled the markets; as markets reacted sharply lower after

N. Korea launched a missile attack on S. Korean Island. Political instabilities in various parts of the world also kept

investors on bay. UK saw its �irst coalition government in its political history this year. Ireland’s Prime Minister

called for mid-term election early next year while French government, led by President Nicholas Sarkozy, may

also see its ruling government in danger in the next polls in 2012. India also witnessed a spate of corruption

scandals in the recent past which proved to be a severe dent on the government image and at one point of time,

markets feared about the stability of the UPA-led ruling government and country’s economic development.

Global economic growth

GDP �igures of developed nations gave some signs of recovery this year after having fallen for three or more than

three quarters starting from late 2008. The world’s biggest economy, U.S., strongly rebounded from the �inancial

crisis but the same was not as proli�ic as it should have been. U.S. economy expanded at a moderate rate of 2.5%

(annualized) in the third quarter this year. High unemployment, which is currently at 9.6%, and de�lationary

fears are mainly hitting the recovery process. Although reports are showing an acceleration of employment with

private sector started hiring and non-farm payrolls are showing an addition in jobs, yet this is not suf�icient to

lower the unemployment rate, which is currently at 9.6%. The same is likely to remain above 9% for all 2011.

Global economy: Divergence continue to remain

ECONOMIC REVIEW

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The other industrialized region, Eurozone, is ailing from

continued debt woes hampering the region’s economic

recovery. Eurozone recovered at the slowest pace,

suggested by 1.9% annual growth rate in three-months

period ended in September. Sovereign crisis and high

unemployment are two key reasons which are deterring

the economy rolling back from the worst crisis since the

World War II. Japan’s economy, though posted 3.90%

annual growth in Q3 2010, also remains uneven with its

currency appreciated by more than 10% this year and

putting pressures on country’s export-driven economy.

Unemployment in Japan also remains above 5%.

India and China, world’s fastest growing economies, undoubtedly led the world economic recovery. China grew

at close to 10% this year while India also posted nearly 9% annual growth rate for the third quarter. Both the

nations have huge domestic demand base which subsequently make them immune to external economic shocks.

Industrial production in both the nations has picked up strongly since recession, except last few months in case

of India. However, higher interest rate scenario and requirement for huge infrastructure base make these two

economies favorable investment destinations.

2011 may see further recovery; but uneven, with developed nations continuing to be trapped in high

unemployment and �iscal issues while emerging countries expanding on the back of their huge domestic

demand. Emerging nations, mainly India and China, will lead the global economic juggernaut, not just in 2011

but for many years thereafter. Industrial nations will post only modest growth because of �iscal consolidation.

Eurozone may take more than expected time to recover as its peripheral countries may see little or no growth.

Bailout to Greece and Ireland may just buy some time but may not address their fundamental solvency issues.

In fact, Portugal and Spain are likely to approach EU and the IMF soon for similar kind of bailouts. We expect the

recovery to be modest in developed nations while developing countries are poised for stronger growth.

Monetary policies

Western economies continued to see loose monetary policies with the U.S. initiating second round of Quantitative

Easing, Eurozone arranging bailouts for its various peripheral countries and Japan involving in further easing

by increasing the supply of Yen this year. Lower interest rate regime continued with U.S. benchmark interest

rate unchanged at 0.25% since Dec 2008, Eurozone interest rate hovering same at 1% since May 2009 and

Japan keeping its rate intact at 0.10% since Dec 2008. The respective central banks were expected to resume

tightening from the second half of this year, assuming in�lation will creep in along with �iscal expansion which

actually didn’t happen. In fact, there are de�lationary issues cropping up as higher unemployment results in

lesser demand.

On the other hand, Asian economies experienced a strong economic recovery with in�lation also rising in tandem

with that and thus, asking for monetary tightening. Asian countries (mainly India and China) tightened their

respective monetary policies and kicked off a round of interest rate hikes. India took its benchmark REPO rate

to 6.25% in November from 4.75% during the same period last year. China increased its lending rate to 5.56%

in October while also raising reserve requirements in an eff ort to mop up the excess liquidity from the system.

Australia also raised its benchmark rate four times this year, to 4.75% in November from 3.75% last year.

Going forward, monetary policies will remain easy in the western world. The Fed, ECB and BoJ are all likely to

keep policy rates on hold in 2011. Only a few industrial countries are likely to hike rates in 2011: those with

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2005 2006 2007 2008 2009 2010 E 2011 E

US Eurozone Japan India China

Source: Bloomberg, KCTL Research

Figure 1: GDP growth

ECONOMIC REVIEW

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high growth (e.g. Australia, Sweden, and Switzerland). By contrast, with strong growth and rising in�lation

pressures, tightening should be widespread across emerging countries. China may hike further 50-100 basis

points, or more so than by end-2011, along with raising reserve requirements.

Figure 2: Interest rates (%) Figure 3: Inflation (%)


Commodity market review

Year 2010 was an eventful year, where commodities

saw greater volatility with many of them rising to

never-before-seen levels. Sugar, cotton and gold saw

their all-time high levels this year while silver and

wheat advanced to multi-year highs. Cotton emerged

out to be the star performer with leading gains of more

than 80% year-till-date, followed by silver advancing

nearly 70%. Many other commodities were changed

by over +30%, so far in 2010.

Commodities markets escalated mainly on grounds of

their inherent properties i.e. alternative investments.

Commodities were chosen by investors as alternative

investments in the wake of uncertain global economic

scenario and volatile currency markets. Precious

metals were primary gainers of volatile currency

markets, fragile economic recovery, geo-political risks

and quantitative easing in the US and Europe.

Industrial metals (copper, nickel, aluminum) were also

seen trading volatile with prices surging signi�icantly

on the back of strong rebound in Chinese demand.

Nickel topped among base metals on expectations of

demand surpassing total supply, while copper also saw

considerable gains because of declining inventories

on London Metals Exchange (LME). LME’s copper

inventory fell for the �irst time since 2004 this year.

Cotton led the agri-pack in terms of highest returns this

year mainly because of Pakistan—the second largest

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Figure 4: Commodity-wise performance— International markets

Figure 5: Commodity-wise performance—Indian markets


Source: Bloomberg

Source: Bloomberg

ECONOMIC REVIEW

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exporter—suff ered from unprecedented �loods which led to the crop damaging by nearly 30-40%. Moreover,

bad weather in the U.S. also forced authorities to revise their production estimates lower several times this year.

Sugar prices zoomed to all-time high of nearly $800/tons in LIFFE market, due to demand-supply mismatch

across the globe. Moreover, European and U.S. markets saw greater use of Sugar into Ethanol production which

also led prices higher. Wheat rose to 14-year high ($8.4/bushel) on account of severe drought in Black Sea Region

i.e. Russia, Ukraine and Kazakhstan.

Natural Gas was this year’s least performer by falling more than 20% on over-supply. Natural gas production—

both conventional and non-conventional—climbed to the highest in current year. Gas storage is currently at

�ive-year high levels. Rig counts have also been increased to 961 in November.

Outlook

Commodities are expected to remain �irm next year, led by growth momentum in emerging nations coupled

with modest economic recovery in the west. Lower interest rate scenario and easy money in the West will

increase the in�low in commodities, mainly metals. Gold and silver will continue to be primary gainers of

uncertain currency markets and weak economic recovery in the developed countries. Rising investment

demand further boosts the price outlook. Among base metals, copper can be picked up as a prospective

investment. Supply would continue to remain constrained as the current available mines are very old and any

new mines development might come only with a lag. As per GFMS, re�ined production might grow by only an

average of 3.4% over 2011-2013. But demand in the largest consumer of metal, China, is expected to continue

to grow at an average of 6% per annum. Thereby, demand-supply mismatch may continue. Overall, we expect

copper prices to remain on the higher side and it even has a fair chance of outperforming the base metal pack in

2011. Price on LME are expected to remain in the range of $8,300 - $11,050/ton during next year while at MCX

platform prices may hover in the range of `360–480/kg in the coming year. Crude oil is another commodity

which may see increased investors’ interest. Heating oil demand may be higher during the �irst quarter as a

result of thrilling winter in the US and Europe during the said period. Winter demand is expected to rise in

couple of months on account of peak winter, so crude oil prices may trade in a higher range, further helped

by recovering global economy. Major global economies are in the stage of improvement. Increasing Industrial

production, manufacturing activities, improving employment with recovering GDP of the major countries are

in queue. Thus, crude oil consumption is expected to rise, on basis of improving demand. Summer holiday

demand depends on the economic situation of the US, which may �luctuate on price movement. Similarly,

impact of hurricane season can not be ruled out. Crude oil prices may be seen trading in the range of $76 -

$120/barrel next year.

Though gold, copper and crude oil can be viewed as best potential trading opportunities, overall commodity

prices are expected to rise a bit further supported by the strength of global demand, especially from developing

nations. Commodities market will attract higher in�lows as long as lower interest rates and quantitative easing

continue in the developed nations. On the other hand, prospects of rising interest rates to rein in in�lation in

emerging nations like India and China may be a matter of concern. But, demand remains robust in these nations,

and thus these rate adjustments may give only some pullbacks in commodities, rather derailing the bullish

outlook for commodities in 2011.

ECONOMIC REVIEW

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Gold: To continue its secular bull run

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The Fed announced Quantitative Easing (round 2) which meant for bond purchases worth of $600 billion

Gold rose to the then all-time high of $1243.10/oz, owing to highetning European sovereign risks

Technical sell-off, as European debt woes calmed down after successfull stress test on European banks

Quantitative easing talks coupled with firm physical demand ahead of festive and wedding season in India kept bullion prices on higher note

Figure 1: COMEX Gold—Price movement chart

Review

Gold’s remarkable secular-trend continued in 2010. Precious metal was largely driven by uncertain global

economic scenario, volatile currencies and loose monetary policies, mainly in western economies, which had

a widespread impact on the global economy. However, emerging nations have contributed signi�icantly to the

global economy in recent times and reduced the dominance of developed world in overall market. Gold and

silver bene�itted on safe haven grounds with weaker currencies (euro and dollar) enhanced bullion’s alternative

investment appeal and supplemented overall gains. Persistent sovereign issues in Europe, Fed’s much talked

about quantitative easing and Korean military hostilities triggered precious metals to take a giant leap this year.

The impact of macro economic factors was more than anticipated, which took gold to all-time high levels and

silver to 30-year highs. Gold repeatedly broke its previous highs in an eff ort to approach new high several times

during the year, and crossed $1400/oz mark for the �irst time in November 2010.

Event-full year 2010 also gave market participants various reasons to speculate upon. Non-commercial holders

(speculators) saw their long positions rising by meagre amount to 269,504 contracts as on Dec 7, 2010 from

263,631 contracts at the end of last year, while short positions increased by nearly 11% during the said period.

Gold’s stunning rise due to uncertain economic conditions and volatile currency markets tempted speculators to

bet upon higher prices and thus, they went increasingly short in the yellow metal. On the other hand, commercial

holders (hedgers) continue to remain net short in gold. Their net short positions are little changed at 278,673

contracts for the week ended on Dec 7, 2010.

PRECIOUS METALS

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Demand-supply dynamics

Demand and supply are known to be core fundamentals

to drive prices. Gold’s rally in 2010 was supported

by stronger demand from all its verticals due to

worsening economic conditions and �luctuating

currency markets.

Third quarter total gold demand (922 tons) was

12% higher than the year-ago period (823 tons), led

by growth in all verticals i.e. jewelry, industrial and

investment. However, the demand fell more than

12.5% from the previous quarter, due to a slump

in investment demand. An increase of over 25% in

jewelry segment partially off set the eff ect of subdued

investment demand in Q3’10 as compared to Q2’10. In

Jewelry segment, India experienced the highest growth

by posting an increase of 36%. Stockists’ buying ahead

of fourth quarter festive season can be attributed to

this growth. World Gold Council reports said that

global gold demand totalled $36.4 bn, a rise of 43%

from Q3 2009. For the trailing 12 months, demand

reached to all time high of $137.5 bn.

Investment demand has seen a major shift over the

years, as this segment now attracts more than 30% of

total demand against merely 10-15% few years back.

Investment demand came into limelight mainly on the

onset of gold ETFs. Among retail investors, gold ETFs are

recognized as a major avenue for making investments

in gold market. SPDR Gold Trust is the world’s largest

ETF backed by gold. This commands nearly 60-65% of

total ETF holdings across the globe and thus, movement

in SPDR gold holdings shows the pattern of investment

demand which further impacts the bullion prices.

SPDR Gold Trust has seen over 14% rise in its

holdings, so far this year, along with nearly 25% surge

in the bullion prices on COMEX. We expect the trend to

continue as weak economic conditions in the developed

nations will result in higher demand for gold as a safe

haven asset. On the other hand, improving conditions

in emerging countries will also help increase the demand for gold as an investment. Recently, China has allowed

its �irst Gold ETF in an order to free-up the nation’s gold market.

Overall demand is also likely to exceed that of 2009, despite third quarter gold demand declined from second

quarter. Strong demand for jewelry in Asian markets and healthy investment demand buoyed by continued

talks over European debt crisis and Quantitative Easing will underpin the yearly growth in global gold demand.

India— undoubtedly the largest consumer and importer of gold—and China—the next to India—are galloping

huge amount of gold, despite higher prices as a result of strong recovery from �inancial crisis. This will support

the bullion prices higher. China has recently given its nod to the nation’s �irst gold ETF ($500 million) in an

Figure 3: Segment-wise gold demand

Source: World Gold Council, KCTL Research

Jewelry , 57.47%

Indsutrial, 11.95%

Investment, 30.57%

Figure 4: SPDR gold holdings

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SPDR Gold Holdings (MT) - RHS

COMEX Gold Spot ($/oz) - LHS



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London PM Fix (USD/oz) - RHS

Figure 2: Gold prices and demand-supply

PRECIOUS METALS

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eff ort to further liberalize the country’s gold market. Federal Chairman Ben Bernanke has advocated for further

quantitative easing, in addition to $600 bn bond purchase programme, after the nation’s unemployment rate

rose to 9.8% in November. Geo-political risks and volatile currency markets will further add to this.

Total supply of gold rose 18% to 1028 tons in Q3’10

from 870 tons a year ago, mainly because of over

40% rise in scrap sales amid record bullion prices.

Total mine supply, including producers’ de-hedging,

expanded more than 8% to 632 tons in the third

quarter. Mine production, core supply source, grew at

3% to 702 tons in Q3’10 from 681 tons in the year-ago

period. Higher prices allured miners to ramp up the

production, as Australia’s Newmont and US’ Barrick

increased their output. Of�icial sector continued to be

the net buyers for the sixth straight quarter ended on

Sep 2010, though purchases were not considerable.

World Gold Council expects that miners will continue

to increase the output as a recovery in demand for gold is witnessed. Higher supply may come from China,

Australia and the U.S., although this increased output may be partially off set by lowering production in South

Africa and Peru. Scrap sales will continue to be a signi�icant source of gold supply amid higher prices.

Co-relation analysis

Gold is strongly correlated with its poor cousin,

silver. The co-relation improved to 0.81 in 2010

from historical (since 2001) number of 0.77 levels.

Interestingly, gold and the dollar index, which share

inverse relationship, were seen to be broken trades.

Both of them moved in similar direction many times

during the year. It was mainly because of both gold

and the dollar index attracting safe haven demand

amidst prevailing European debt concerns and other

geo-political tensions. Crude oil and equities were

other assets which saw their relationship getting

strengthened with the yellow metal in year 2010.

COMEX Gold and the Dollar Index

Historically, gold has been found moving inversely to the dollar index, a performance gauge of the greenback

against the world’s six major currencies. The year 2010 was extremely volatile as far as currency markets are

concerned, because of uncertain economic conditions, European sovereign crisis and geo-political risks. These

all concerns stoked safe have in demand for both the dollar and gold. This also resulted in historical inverse

relationship between gold and the dollar index being broken several times during the year. The dollar index, after

having �luctuated throughout the year, managed to gain over 3% while gold rose for the tenth straight year by

nearly 24%.

Gold futures on MCX platform also saw a similar run, though were little subdued due to rupee appreciation. MCX

gold futures advanced by nearly 22% while the rupee appreciated by 2.7%. India’s gold demand also revived

this year after having fallen in the last year as a result of recessionary impacts. India imported 624 tons of gold

till September 2010, far ahead of last year’s total imports of 559 tons, according to World Gold Council.

Figure 5: Segment-wise gold supply


Mine Supply,

60%

Scrap Sales, 40%

Figure 6: Correlation – Gold vs. key other assets


PRECIOUS METALS

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Gold/Silver ratio

Gold/Silver ratio dropped to the lowest in more than two

years during the 4th quarter of 2010. The ratio closed

at 48.09 on Dec 10, 2010. Average gold/silver ratio

hovered at around 62.74 levels during the year against

last year’s average of 66.85, a decline of over 6%. The

decline in average gold/silver ratio can be attributed to

silver performing far better than gold. European debt

concerns, uncertain currency markets, quantitative

easing and geo-political tensions stoked the demand

for precious metals. But, silver saw higher safe haven

demand as a result of being much cheaper alternative

to gold. Silver is expected to be the star performer this

year among all commodities with over 70% surge in prices. We are expecting the ratio to catch up till 55-60

levels in the near future. This makes a strong case of gold leading from here and outperforming silver.

Gold/Crude ratio

Gold/crude ratio increased as a result of gold

outperforming crude oil, which was mainly seen

during the �irst half of the year when European debt

crisis were on peak. Sovereign risks in Europe caused

gold to rise as a safe haven, but crude oil took a beating

during the said time. Gold rose over 24% on COMEX

while crude oil prices gained merely 11% on NYMEX

so far this year. However, the average gold/crude ratio

slipped to 15.45 during the year from 16.34 last year.

It was mainly because of crude oil prices witnessing a

huge recovery in 2009 after the �inancial crisis in the

year before, however; crude oil failed to carry on the

same momentum and gained just over 10% in 2010. This resulted in average gold/crude ratio declining on y/y

basis. We expect the average gold/crude ratio to fall further as crude oil prices may trade on an average of $90/

barrel next year against this year’s average of $80/barrel, while gold may see average price level of $1340/oz

against this year’s average of $1220/oz.

Figure 7: COMEX Gold vs. Dollar Index Figure 8: MCX Gold vs. Indian rupee


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15000

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18000

19000

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21000


MCX Gold Indian Rupee


75

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81

84

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90

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COMEX Gold Dollar Index

Figure 9: Gold/Silver ratio


40

45

50

55

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65

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75


Gold/Silver Ratio

13

14

15

16

17

18

19


Gold/Crude Ratio

Figure 10: Gold/Crude ratio


PRECIOUS METALS

15

The year ahead

Gold prices are expected to remain underpinned by strong demand in emerging nations, mainly in India and

China.

Strong demand for jewelry in Asian markets and healthy investment demand buoyed by continued talks over

European debt crisis and Quantitative Easing will underpin the yearly growth in global gold demand. India—

undoubtedly the largest consumer and importer of gold—and China—the next to India—are galloping huge

amount of gold, despite higher prices as a result of strong recovery from �inancial crisis. This will support the

bullion prices higher.

Investment demand: Gold’s investment has seen a tremendous change in the recent past as investors have

accumulated gold to shield their wealth against currency depreciation and uncertain economic conditions. ETFs

have made this easier for prospective gold investors. In this context, China has recently given its nod to the

nation’s �irst gold ETF ($500 million) in an eff ort to further liberalize the country’s gold market.

Quantitative easing: Markets have seen two rounds of quantitative easing, including the recently announced

$600 billion bond purchase programme. However, Fed Chairman Ben Bernanke has advocated for further

quantitative easing, after the nation’s unemployment rate rose to 9.8% in November.

Geo-political risks and volatile currency markets will further add to this. Economic recovery in Western

countries will continue to remain weak, which will weaken their respective currencies. Currency devaluation

will increase the value of the bullion.

Lower interest rate: Developed nations are still sticking to their low interest rate scenario which means

precious metals should continue to attract alternative investment demand.

Central banks will continue to be net buyers in an order to diversify their forex reserves. Asian central banks

are leading the way. The IMF also earmarks certain amount of gold to be sold every year in open market to raise

funds for �inancing poor nations.

Silver

Silver gave a long awaited breakout which was seen as extremely positive to silver bulls. Silver prices experienced

intense volatility during the year, and eventually �inished the year as one of the leading gainers in whole commodities’

complex. Silver prices started the year with somewhere at around $17/oz and rose to $20/oz till September-half.

Prices �luctuated frequently in that range. However, breakout was seen only in the second fortnight of September

when silver blew through $20/oz and ended the September month at close to $22/oz levels. Subsequently, the

white metal did not look back and marched higher as if there is no tomorrow. Since October, it took less than 50

trading days to reach $30/oz mark, level not seen in the last 30-years. Though the metal witnessed some correction

during the period, but dips were seen as further buying

opportunity and resultantly, the metal’s upward moves

were faster than its downward movements.

Silver rode the coattails of gold which was also seen

marching higher throughout the year, �inding one

reason after the other. European debt crisis during the

year, weaker dollar at times, quantitative easing part-

II in the U.S., and geo-political concerns stoked the

demand for precious metal as safe haven avenues to

park investors’ money. Moreover, silver also bene�itted

from being a cheaper alternative to gold and therefore,

attracted more in�lows.

Figure 11: iShares’ silver holdings


8600

9000

9400

9800

10200

10600

11000

14

19

24

29

34

5-Jan-10 5-Mar-10 5-May-10 5-Jul-10 5-Sep-10 5-Nov-10

iShares Holdings (MT) - RHS

COMEX Silver ($/oz) - LHS

PRECIOUS METALS

16

A steep increase in silver prices this year also tempted speculators to take short positions at such high levels, or

bet that price may fall. CFTC reports suggested that long positions, held by non-commercial holders, declined

while short positions nearly tripled to 9,637 contracts on Dec 7, 2010 from 3,165 contracts last year. This

resulted in a decline in speculators’ net long positions by nearly 15% to 32,069 contracts as on Dec 7, 2010

against 38,721 contracts at the end of the previous year. Talks of manipulating prices, mainly controlling silver

prices through building large short positions, also prevailed during the year. CFTC carried out the investigations

but abstained from naming the manipulators. If these allegations are found to be true, then it is understood that

silver prices could go haywire in case of these short positions are unwound.

Figure 12: COMEX Silver vs. Dollar Index


Figure 13: MCX Silver vs. Indian rupee


Outlook

Recently, gold prices broke into new record territory—rising above $1400/oz. But this was in nominal terms.

It could have been much higher, probably double from here, if adjusted to in�lation. Similarly, silver is way

behind even its previous nominal high of above $50/oz (Jan-80), let alone in�lation-adjusted silver prices. This

represents that silver is hugely undervalued and thus, has great potential of marching higher.

While developing forecasts on silver prices, we need to consider large economic trends, interest rates, gold

prices, and international politics. With historical silver prices in 2010 oscillating between $16/oz and $30/oz,

what could happen to future value of this industrial-cum-precious metal in 2011?

Though current economic trends are uncertain, but emerging economies will steer the global economy from

dark clouds. Industrial activities are likely to pick up which will be seen as positive for silver prices, as the metal

is widely used in industrial applications in addition to jewelry usage. Silver has high conductivity, the ability

to withstand very hot temperatures along with anti-bacterial properties. Because of this and other attributes,

silver is used in coating switches and buttons in electronics, circuit boards in computers, medical applications

such as bandages, batteries, mirrors, solar energy, soldering and brazing, and bearings.

Many investors prefer to hedge the market with the precious metal gold instead of silver. While silver does

receive some sympathy investing when gold prices rise, it also receives a boost in value when industry picks

up. We are anticipating the gradual return of a more robust economy in the coming year, led by strengthening

emerging economies. As manufacturing and production increases, the demand for silver should go up as well.

The increased demand may help the price of silver per ounce grow faster than gold in 2011.

Silver is also likely to attract greater attention from the fund community; particularly in the US. Owing to its

outperformance, the white metal is likely to receive more importance. The silver ETF holding with the iShares

Silver Trust (world’s largest silver ETF) has grown more than 15% to 10964.14 MT so far in 2010. Investment

demand will continue to play a dominant role in rising silver prices.

Silver’s overall positive outlook will also be supported by lower interest rate scenario in western economies,

which will enhance precious metal’s alternative investment appeal. Weak economic developments are forcing

74

78

82

86

90

14

19

24

29

34


Silver ($/oz) - LHS Dollar Index - RHS

44

45

46

47

48

23000

31000

39000

47000


MCX Silver (Rs./kg) - LHS Indian Rupee - RHS

PRECIOUS METALS

17

Recent wave: Minor wave 3 of intermediate wave (5) of primary wave 5

The view for gold future prices is likely to remain higher initially for the year 2011. We expect a limited upside

gain till $1502-1550 levels. Thereafter, we might see a correction in the prices. However, in near term market

is expected to see a mild lower correction i.e. minor wave 4 of intermediate wave (5) of primary wave 5. The

downside potential for minor wave 4 could be till $1326 or it can extend till $1294 levels. Henceforth, minor

wave 5 is expected to resume uptrend, which would help the prices to gain till $1502 or till $1550 levels. Overall,

we expect market to hover in the band of $1240-1502 levels for the year 2011.

Elliot wave analysis: Silver

Recommendation:

Silver COMEX: 1-2 month—Sell at 29.5-30 targeting 28 then 27 with stop loss above 31.5

Silver COMEX: 6-9 months—Buy at 24-26 targeting 32.5 then 35 with stop loss below 19

Silver MCX: 1-2 month—Sell at 45000-45500 TP 42800 then 41000 SL 47000

Silver MCX: 6-9 month—Buy at 40000-41000 TP 46000 then 50000 SL 35800

Recent wave: Minor wave 4 of intermediate wave (5) of Cycle I is expected to progress, which would lead the

prices to see a correction.

these nations to keep interest rates lower and pump in more money to spur their domestic economic growth.

The Fed and ECB will continue to stick to their lower interest rate i.e. 0.25% since Dec 2008 and 1% since

May 2009, respectively. Precious metals, in this case, remain preferable alternative investments. Geo-political

concerns and global political issues will further drive silver prices higher.

Elliot wave analysis: Gold

Recommendation:

Gold Comex: Buy at 1300-1320 TP 1430 then 1500 SL 1240

Gold MCX: Buy at 19500-19900 TP 20900 then 21400 SL 18300

PRECIOUS METALS

18

As per the analysis silver prices made a recent high of $30.92 levels in the month of December, 2010 and currently

hovering at $29.0762 levels. According to �ibonacci principle market gained as much as 161.8% ($30.8197)

projection of primary wave 2($6.04) to primary wave 3 ($21.3550). However, if market fails to create new high

above $30.7025 con�irms the end of gains followed by a correction. The key support level is at $27.96 levels

(Previous swing low) on breach of the same it may extend its correction till $26.4800 levels.

Overall, analysis suggests silver prices to see a downside correction with 3 wave sequence of minor wave 4 (till

$27.54 or it can extend up to $25.58). Henceforth, minor wave 5 is expected after completing of minor wave 4,

which is likely to see a gains in the prices for medium term.

PRECIOUS METALS

19

Base metals witnessed roller coaster ride in 2010 with macro issues like sovereign debt crisis of euro-zone,

monetary-tightening in China and quantitative easing in US driving the major movement. London Metals Index

(LMEX Index) ended higher by 16.15% at 3,953. Demand of metals remained strong, especially from emerging

nations like China and India. But supply was not able to catch up with the growing demand and metals like

copper touched new life-time high. This is remarkable that just one and half year into the recovery and prices

are already making new life time highs. It is an indication that even if growth is moderate in developed nations,

emerging economies might make up for the diff erence. In fact, on many fronts, be it the imports or GDP growth

rates, emerging nations have already surpassed the previous peaks.

Among the base metals, nickel was the top performer

on the back of balanced market followed by copper

which made new life time high given the tight supply

conditions. Aluminium prices remained largely

unchanged as both demand and supply remained

stable with moderate growth. Zinc and Lead ended

lower as stocks on London Metal Exchange increased

for second consecutive year.

Going forward, emerging economies might witness moderation in growth given that the higher base of 2010

that they would be operating on to, but still would be at reasonable levels for the demand to remain strong.

Developed nations as a continue to face challenges and thereby might only see a slight pick up in demand given

the austerity measures in nations like Europe and Britain and high unemployment rate in US.

In�lation in China has moved higher to 5.1 % in November, highest in almost two years, raising fears that interest

rates would be increased and thereby demand might get impacted. However, we are not expecting any major set-

backs for the Chinese economy as any hike in interest rates would only be an exit from loose monetary policy and

that is commensurated with the rebound in the economy. In fact, delay in rate hikes might impact the economy

negatively as in�lation might get out of hand and might lead to bubbles especially in the property market.

Indian economy has already gone through six rounds of rate hikes, but the economy continues to remain strong and

the GDP grew by 8.9% in the �irst half of �iscal year 2011. In�lation might moderate but not to the extent expected,

especially when oil prices are headed back towards the triple-digit mark. So rate hikes might continue in 2011 as

well. Also the capex cycle has been slow to pick up and

thereby remains a risk factor for slowing growth.

In US, unemployment rate continues to remain closer to

10% mark. Fed has already announced support of $600

billion and the president has favoured tax cuts to be

extended for two more years. In 2011, the biggest risk

for US would be that the investors get concerned about

the budget de�icit and thereby might push up bond

yields. Impact of quantitative easing may soon start to

fade and any incremental easing might not support the

economy. Given that the economy is expected to remain

weak, demand growth might remain muted.

Base metals: Strong year ahead

Table 1: Returns of base metals in 2010

Base metal LME (%∆) MCX (%∆)

Nickel ↑ 29.5 ↑ 25.6

Copper ↑ 21.9 ↑ 19.5

Aluminum ↑ 3.5 ↑ 0.9

Lead ↓ 1.7 ↓ 3.2

Zinc ↓ 11.1 ↓ 14.4


BASE METALS

2500

2700

2900

3100

3300

3500

3700

3900

4100

4300


Figure.1: London Metals Index


20

Euro-zone is the one which is strongly favouring austerity measures as against easing measures and seems

rightly so given the weak �iscal state, especially of peripheral European nations like Greece, Ireland and Portugal.

Government spending cut along with extra burden of taxes might keep the demand tepid in smaller nations, but

countries like Germany might continue to bene�it from stronger demand in emerging markets and thereby

stronger exports may drive its growth.

Overall, incremental demand growth is expected to

come in from emerging markets and given the state of

there economies, growth might remain robust.

On the supply side, companies are not able to ramp up

production to meet the increased demand as mining

industry increasingly face constraints in the form

of workers strike and environmental issues. The

ore content is also declining thereby requiring more

extraction of material to produce same level of output.

Mines are also becoming increasingly old and any new

developments might only come with a lag. So supply

largely is expected to remain under pressure and the demand growth may far outpace the supply growth.

Given the demand-supply and macro dynamics in favourable state, we expect base metal prices to remain

on the higher side. Among the base metals, copper and lead are expected to outperform the other base

metals given relatively strong fundamentals.

One obviously cannot ignore the risk factors which broadly are the fear of unknown, signi�icant monetary

tightening in emerging economies and rising borrowing costs for developed nations. At the start of 2010,

sovereign crisis in euro-zone came in from no where and took most of them by surprise. So at any point in time,

the world might face any unexpected event, the probability of which increases as the world witnesses’ use of

diverse tools and the outcome of which is hardly known. Countries like India and China continue to go in for

monetary tightening and if in�lation does not moderate then signi�icant tightening might increase the cost of

capital for companies thereby delaying the acceleration of investment cycle. US bond yields have declined as

Fed increases the quantum of bond purchases, however, if investors become concerned about the rising budget

de�icit then yields might soon shoot up thereby spilling trouble for commodity prices.

Figure.2: Industrial production


4

6

8

10

12

14

16

18

20

Feb-10 Apr-10 Jun-10 Aug-10 Oct-10

India China

BASE METALS

21

Price performance: Aluminium prices ended 2010 with gains of 3.5% at $2,308/ton on LME while on MCX prices

ended largely unchanged at `104/Kg. Throughout the year aluminium price remained in the range of `86 to `110,

the narrowest among all the base metals. Demand from electronics and automobile sectors was strong however

this could not translate into price rise as stocks on London Metal Exchange continued to remain high.

Figure.1: LME price ($/MT) Figure.2: MCX price (`/Kg)

Aluminium: Surplus to narrow down

Source: Bloomberg, KCTL Research Source: Bloomberg, KCTL Research

Fundamentals

As per World Metal Statistics, in the �irst nine months of 2010, aluminum production amounted to 30.53 million

tons while consumption amounted to 29.94 million tons, thereby keeping the market in surplus. This is in fact

one of the reason that aluminum stocks have not witnessed substantial draw-downs. However, the silver lining

is that the Chinese aluminium consumption, which accounts for close to 35% of the world consumption, has

been picking up given the strong demand for consumer durables like automobiles.

In the last quarter of 2010, aluminum production in China, world’s biggest producer, might decline as many

provinces have been cutting production to meet year-end energy saving targets set by the government. Existing

plants might remain idle and new capacity additions may be delayed as aluminum production is an energy-

intensive process.

Asia’s largest importer, Japan, continues to win cut in premiums for fourth consecutive quarter as the demand

in the country for the metal has been on a declining trend and a stronger Yen has only added to the woes.

Premiums for �irst quarter of 2011 are set at $112/ton over the London cash price as against $116 to $118/ton

in the last quarter of 2010.

The basis, the diff erence between cash and forward, currently stands at $10/ton as against average of $28 that

prevailed in 2010. Declining basis is indicating tightness in supply conditions. In fact in late August, market even

moved to backwardation for a brief period. In the recent past, the tom-next spread, the fee to borrow aluminium

for next day delivery has also been rising thereby reiterating tight supply conditions. Nearly 70% of the aluminum

stocks on LME are locked up in �inancing deals and so might not be available for delivery despite higher demand.

So any spurt in demand in the short term would put an upward pressure on prices.

Inventory: Stocks of aluminium which remain at high levels on London Metal Exchange are witnessing draw-

downs, though at a slower pace. In 2010, stocks declined by 7.6% or 354,400 tons and currently stand at 4.27

million tons.

Warehouses in China witnessed increase in stocks by nearly 35% in 2010. However, in absolute terms stocks stand

at only 452,371 million tons, which is a mere 10% of stocks on LME. On the contrary, stocks of unwrought alumi-

num in the western world fell to 1.29 million tons in September as against 1.32 million tons in the prior month.

1800

1900

2000

2100

2200

2300

2400

2500

2600


80

85

90

95

100

105

110

115


BASE METALS

22

Outlook: China is aiming to phase out nearly 3 lakh tons of aluminum capacity by limiting the energy supply. Also

given the range bound prices of aluminum as against substantial higher prices of other base metals; producers

might not be inclined to add capacity aggressively. So growth in aluminium production might remain limited going

forward. However, demand from user industries like electronics and automobiles is expected to remain high given

the strong domestic demand in emerging economies like China and India. So the market might continue to remain

in surplus in 2011 but the quantum would narrowdown. There have been indications that Exchange Traded

Products on aluminum might soon be launched and that might increase the investment demand for the metal.

Elliot wave analysis

Aluminium LME 3M: Buy at $2170-2260 TP $2700 then $2950 SL $1820;

Aluminium MCX: Buy at 101-104 TP 118 then 125 SL 89

Aluminium forward prices are expected to gain for this year (2011) as the Elliot wave analysis suggests

bullishness. At present, intermediate wave (1) of primary wave 3 is in progress, by nature this wave is expected

to be the longest among others. The resistance is seen at $2500 levels (previous swing high). A signi�icant break

above the same leads the market to gain further and thus con�irm the primary wave 3 is in progress. In case

market fails to breach the resistance at $2500 levels we would possibly see a correction for short term. The key

support level to watch is at $1820 levels and sustain above is expected to remain higher. The gain for 2011 is

expected till $3000-3100 levels. We expect prices to move higher and recommend buying.

250000

300000

350000

400000

450000

500000

550000


4200

4300

4400

4500

4600

4700


Figure 3: LME inventory (In ‘000 tons) Figure 4: Chinese inventory (In tons)


BASE METALS

23

Performance: In 2010, copper is the second best performer among the base metals as it ends the year with

gains of 21% on LME and 19% on MCX. By the end of year, copper price was at an all-time high. On LME, they

made a new high of $9,091/ton while on MCX it made a high of `415/Kg. Tight supply conditions along with

strong demand from emerging economies like China sent prices higher. Quantitative easing measures being

taken in US also boosted commodity prices.

Figure 1: LME price ($/MT) Figure 2: MCX price (`/Kg)

Copper: Supply to remain tight


Fundamentals

According to the International Copper Study Group, copper demand surpassed supply by 363,000 tons in the

�irst eight months of 2010. In 2011, the consensus estimate is that the demand will outpace supply by 367,500

tons thereby bringing the market into de�icit. Stocks at warehouses of London Metal Exchange are already

witnessing continued decline. Chinese production of copper in the �irst nine months of 2010 amounted to 3.9

million tons, up by 13%. Despite this it had to rely on imports as its consumption amounted to 5.6 million

tons.

On the industry front, some of the reports indicated that Codelco, world’s biggest copper producer has agreed

to raise premium on sales by 35% in 2011. The premium, which is added to the prevailing spot price on London

Metal Exchange, might increase to $115/ton as against $85/ton this year. A higher premium indicates stronger

demand for the metal and the rate set by Codelco might be taken as a benchmark by other producers as well.

Workers at world’s third largest copper mine, Collahuasi, went on strike demanding higher wages. The strike

lasted for 32 days-the longest ever at a major Chilean mine. However, during the strike the production remained

largely normal.

Supply continues to remain tight: The LME Spot prices are trading at premium to three month forwards

indicating tight supply in the near term. The premium is currently hovering around $35/ton and during the

strike at Collahuasi mine, which has ended now, the premium rose to as higher as $60/ton.

Inventory: Demand for the red metal continues to remain strong and given the constraints in supply being

witnessed, stocks from London Metal Exchange warehouses continued to decline. After 2004, this year would

be the one when warehouses would witness largest net out�lows. Stocks on LME declined by nearly 30% or

146,500 tons this year and currently stand at 349,450 tons.

After witnessing build-up of stocks in the �irst half, as traders arbitraged between LME and Shanghai, ware-

houses in China also are witnessing decline in stocks. In absolute terms also, stocks remain at a meager levels

of 115,964 tons.

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9000

9500


270

290

310

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370

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BASE METALS

24

Figure 3: LME inventory (In tons) Figure 4: Chinese inventory (In tons)


Outlook: Supply would continue to remain constrained as the current available mines are very old and any new

mines development might come only with a lag. As per GFMS, re�ined production might grow by only an average

of 3.4% over 2011-2013. But demand in the largest consumer of metal, China, is expected to continue to grow at

an average of 6% per annum. Thereby mismatch in demand and supply might continue. According to the LME

report, a single trader holds close to 90% of the available stocks. So any increase in demand might straight away

put upward pressure on copper prices.

Treatment charge and the re�ining charge which represents the pro�it margin of smelters which declined in 2010

are also expected to increase as mining companies seek to secure re�ining capacity. On the contrary, in times of

tight concentrate supply, companies are forced to off er lower fees (i.e., lower pro�its) to attract suf�icient raw

materials to keep their smelters running.

Exchange traded products on copper have also been launched which would be traded on London Stock Exchange

thereby providing another avenue to bet on the rise of red metal. Given the success of ETF’s of gold and silver,

copper ETF might soak away some of the stocks available on LME.


Copper LME: Buy at $8450-8700 TP $10000 then $10900 with stop loss below $7200

Copper MCX: Buy at 405-410 TP 470 then 490 SL 370

We are carrying a bullish view for the coming year. At present, market is in motive wave i.e. primary wave 3

is in progress, which is likely to

extend its gains till $10500 or it

can extend till $11000 levels with

�ive wave sequences. Initially, we

are expecting a lower correction

having strong support near

$8000 levels. Sustained trade

above $8000 levels would be a

good buying opportunity at dips.

Previous year market made a low

of $7920 levels this would be a

key support level to watch for

the year 2011. Overall, analysis

suggests upside potential and

we from KCTL recommend

buying.

300000

350000

400000

450000

500000

550000

600000


70000

90000

110000

130000

150000

170000

190000

210000


BASE METALS

25

Performance: After a strong 2009 when prices rose by 143%, 2010 was a down year for lead. On LME, prices

declined by 1.8% to end at $2,390/ton while on MCX lead price fell by 3.2% to `108. Continued increase in

stocks for second consecutive year lead to underperformance while quantitative easing by Fed and gains by

other metals limited the losses.


Lead: Strong demand from automobile sector


Fundamentals

According to International Lead and Zinc Study Group, in the �irst nine months of 2010, world lead production

grew by 4.4% to 6.71 million tons while consumption grew by 5% to 6.67 million tons. Overall, the market

continued to remain in surplus of 41,000 tons.

In 2010, the projections are that demand would increase by 4.5% to 9.02 million tons while in 2011 the group

expects it to accelerate further by 5.8% to 9.55 million tons. The market is expect to remain in surplus of 90,000

tons in both 2010 and 2011.

Robust automobile demand

China overtook US to become the world’s largest automobile market in 2010, indicating strong domestic

demand especially for consumer durables. This might continue ahead as well given that emerging nations are

re-orienting more towards domestic demand so that they are least impacted in case of any contingent event in

the western world.

In the �irst nine months of 2010, total car sales in China amounted to 9.9 million thereby registering growth of

staggering 37% over the same period a year earlier. In India too sales grew by nearly 32% to 1.37 million cars.

70

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1500

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Figure 3: Car sales - China Figure 4: Car Sales - India

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500000

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700000

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900000

1000000

1100000

1200000

1300000

1400000

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

90000

100000

110000

120000

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140000

150000

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170000

180000

190000

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10


BASE METALS

26


Inventory: On London Metal Exchange, lead stocks increased by 40% or 58,300 tons by the end of 2010.

However, this comes on a very low base 146,075 tons, the lowest among all the base metals. The total stocks now

stand at 204,375 tons. The basis also continues to remain at average levels indicating enough supplies to meet the

demand.

Outlook: Purely on demand-supply situation market is expected to remain on surplus next year. However, we

are taking a bit of contra call on the demand side and expect it to remain on the higher side, supported by good

demand in developed nations as well. Replacement demand from nations like US might remain higher given the

cold weather prevailing there. So demand is expected to remain on the higher side supported by strong demand

for automobiles in emerging economies and higher replacement demand from developed nations. Bullish

prospect for other base metals are also expected to support lead prices.


Lead LME: Buy at $2200-2340 TP $2900 then $3120 SL $1740

Lead MCX: Buy at 103-105 TP 120 then 129 SL 92

Lead 3M forward prices are

showing an upside potential for

the coming year. Market is in

bullish mode as per the Elliot wave

analysis; wherein intermediate

wave (1) of primary wave 3 is in

progress. The length of this wave

is expected to be the longest

among others. The gains are

likely to extend till $3120 or it can

extend till $3380 levels. On the

higher side market is �inding a stiff

resistance near $2690 (previous

swing high). A convincing break

above the same leads the prices to

gain further. The strong support is seen at $1770 for 2011. Overall, we expect lead prices to move higher and

recommend buying for medium term.

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210000


0

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20

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Figure 5: LME inventory (In tons) Figure 6: BASIS on LME

BASE METALS

27

Price performance: Nickel is the star performer of 2010 among the base metals as it ends the year with gains

of 29.5% on LME and 25.62% on MCX. Prices stood at $23,980/ton on LME while on MCX it ended at `1,084/Kg.

Balanced market along with strong demand from steel sector, the major user industry of the metal, supported

prices to trade higher.


Nickel: Balanced market to support prices


Fundamentals

According to World Bureau of Metal Statistics, in the �irst nine months of 2010, world nickel demand exceeded

supply by 41,000 tons as against de�icit of 16,500 tons in the previous year. On the other hand, as per International

Nickel Study Group, global nickel market will move into net surplus of 80,000 tons in 2011 as against balanced

this year. Total output might reach 1.61 million tons as against 1.43 million tons this year whereas consumption

is forecast to rise to 1.53 million tons as against 1.43 million tons in 2010. The increased output is expected to

come in from ramp up of recently commissioned plants as well as set-up of new capacities.

Given the strong demand from steel sector and higher prices, new capacity additions is taking place and expected

to come on-stream in 2011. According to some reports, China will produce more than 180,000 tons of nickel

contained pig iron in 2011. Norilsk Nickel, world’s largest nickel producer, which supplies close to 20% of the

world output, is also investing close to $20 billion to stop the decline in output.

Inventory: Inventory on London Metal Exchange continue to witness draw-down given the strong demand

from steel sector and balanced market. In 2010, stocks declined by 15% or 22,752 tons to end at 131,184 tons.

16000

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Figure 3: LME inventory (In tons) Figure 4: Basis on LME

BASE METALS

28

In absolute terms, stocks are the lowest among all the base metals. The market moved into backwardation in

October, as supplies got tight, because of concerns about the dispute at the world’s largest producer, Norilsk

Nickel but has crawled back to average levels.

Outlook

Demand for steel, major user industry of nickel, is expected to remain high in emerging economies like India

as the construction activity gathers pace. For higher economic growth to remain sustainable for a long period

there nations have to invest in infrastructure and given the indications infra spending is expected to increase in

the year ahead.

Higher prices have deterred purchases from Chinese buyers in the second half of 2010. But China being the

largest producer of steel might soon start to restock nickel, thereby boosting demand for the metal. In developed

nations too, demand might pick though at a moderate growth rates. Overall strong demand is expected to keep

nickel prices buoyant.


Recommendation

Nickel LME 3M: Buy at $22900-23400 TP $27500 then $32400 SL $17200

Nickel MCX: Buy 1st lot at 1050-1070, 2nd lot at 940-970 targeting 1340 then 1400 SL 820

As per the Elliot wave analysis, currently market is in intermediate wave (5) of primary wave 3 of cycle 3. The

nature of this wave is motive and is expected to gain for short to medium term. The next immediate resistance

is seen at $25200 levels (Previous swing high). On breach and sustained trade above would lead the gains till

$27595 levels. However, if market closes above $27595 levels (primary wave 1 top) will con�irm bullish trend

for long term. The key support level to watch is at $17300 levels. The upside potential is seen till $34000 then

$35700 levels for long term.

We from KCTL see the prices of nickel to trade higher and recommend buying.

BASE METALS

29

Price performance: In 2010, zinc underperformed the entire base metal pack as weak demand along with

continued rising inventories sent prices lower. Year on Year prices fell by 11% to $2,274/ton on LME and in Indian

markets prices fell by 14% to `103. In fact, zinc was the only base metal to end the year with double digit losses.


Zinc: To track other base metals

1500

1700

1900

2100

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2900


70

80

90

100

110

120

130



Fundamentals

According to International Lead and Zinc Study Group, in the �irst nine months of 2010, world zinc re�ined

production amounted to 9.46 million tons, a growth of 15.4% Y/Y. Consumption growth, however, remained

muted to 17% and amounted to 9.28 million tons. Thus the market remained in a surplus of 175,000 tons. For

the whole of 2010, the surplus is estimated to come in at 233,000 tons. Demand growth from China was lower,

at 14%, as steel companies continued to cut output.

Going forward, in 2011, global production is expected to rise by 10.9% to 12.53 million tons. The increased

output will come from China and from developed nations where certain plants which were closed earlier owing

to weak demand are expected to be reopened. On the demand front, global demand is expected to rise by 6.3 %

to 13.07 million tons. Higher demand from China and Europe are expected to drive the growth. But on the whole

market is expected to remain in surplus of 161,000 tons.

However, in the second half of 2010 prices did move higher as production was reported to be cut in China as

the country geared up to meet energy saving requirements. Though they were no clear estimate of the level of

production cuts but some reports put it close to 300,000 tons which constitutes close to 5% of total Chinese

production.

Figure 3: LME inventory (In tons) Figure 4: Chinese inventory (In tons)

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660000


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BASE METALS

30

Inventory: Higher stocks have been an area of concern and a major reason for zinc prices remaining a laggard.

Both London Metal Exchange and Chinese warehouses witnessed increase in stocks in 2010. On LME, stocks

increased by a massive 30% or 144,450 tons thereby taking total stocks to 630,725 tons. Warehouses in China

too witnessed increase by nearly 75% or 127,525 tons thereby taking total stocks to 299,425 tons. Both together,

this constitutes nearly 10% of annual global demand. Higher stocks might continue to weigh on the prices ahead

also unless demand really picks from the steel sector.

Outlook: Purely on demand-supply conditions, zinc market continues to remain in surplus and there seems

enough cushion of stocks that are available in case of higher demand growth. Steel producers in China, world’s

largest producer, have been cutting output because of huge build-up of stocks. This might even result in lower

demand for zinc whose major user industry continues to remain steel. So movement in other base metals might

decide the movement of zinc prices in the year ahead.


Recommendation

Zinc LME: Buy at $2170-2250 TP $2600 then $3000 SL $1800

Zinc MCX: Buy at 101-104 TP 123 then 131 SL 92

Outlook: Zinc prices are expected to gain in the year 2011 as per the Elliot wave analysis, which is suggesting a

bullish view. Recently market took a correction till $2019 levels thereafter it started rising, which we consider

as a minor wave 3 of intermediate wave (1) of primary wave 3. The initial upside potential is seen till $2638

levels. On breach and sustained trade above $2638 would con�irm upside swing for short –medium term till

$3000 then $3280 levels. The key support level to watch out is at $1900, which may help the prices to remain

higher. We from KCTL expect prices to gain form here and recommend buying.

BASE METALS

31

The below mentioned chart depicts the seasonality of crude oil price movement. However, the seasonality was

broken in CY 2010 attributed by upset fundamental and economical factors. So, let’s see how the seasonality has

broken. The above two factors led crude oil prices to make two years high in CY2010. Future prices breached

2009 high with a lot of ease, showing consistent stability to stay above US$80 per barrel in Q1 2010 up by 6

per cent. Oil prices were mostly driven higher due to winter season in U.S. Thereafter, oil prices fell over 10

per cent in Q2. Though BP oil disaster took place in April but failed to have signi�icant impact on the prices as

world oil market was passing through a lean period for consumption. While talking about economic events, in

the month of May, International Monetary Fund (IMF) and European Central bank (ECB) approved bailout for

Greece thereby resulting dollar index to decline.

Crude oil: Likely to trade in 3-digit

Commodity Q1Y09 Q2Y09 Q3Y09 Q4Y09 Q1Y10 Q2Y10 Q3Y10 QTD

NYMEX Crude Oil 11% 41% 1% 12% 6% -10% 6% 10%

MCX Crude Oil 24% 35% -0.20% 12% 1% -6% 2% 10%

Source: KCTL Research

Figure 1: Seasonality of crude oil price movement

As a result of weak dollar, crude oil prices again traded higher in the month of May. Though, second quarter is

considered as a lean period, prices have fallen more than any other quarters of CY 2010 led basic seasonality to

break. Similar trend was witnessed on third quarter, though some recovery was seen at the end of the quarter.

Third quarter of CY2010 is the of�icial hurricane season, which was expected to fuel the energy prices in 2010.

But, it failed to have a major impact on the oil market as eff ect of tropical storms was very negligible. Furthermore,

weakness in economic growth also kept the oil market under pressure. Energy producing companies drilled

more oil on speculation that summer driving season would create more demand for energy products. However,

demand could not match with the supply due to slower growth of major world economies, thereby resulting

into a bearish trend for the oil prices. Meanwhile, Ireland also got bailout from IMF and Europe union. Later

on recovery in US economy along with �luctuating US dollar and rising demand for heating oil in winter season

again improved oil demand thereby oil prices climbed to two years high.

Below mentioned table depicts the performance of Oil since the beginning of year 2009 till the end of 2010. We

may �ind oil prices declined the most in the q2 of CY2010. The reasons are stated in the above analysis.

ENERGY

32

CFTC positioning

As per CFTC data, speculators have increased their

long positions by 27 per cent in CY10, whereas

hedgers/commercial traders increased their long

positions by only 5 per cent.

Economy and oil prices

Global economic conditions always have in�luence

oil price movement. Major economies like Euro zone,

US, China and Japan are the major drivers’ oil price.

The year 2010 started with European debt crisis and

Figure 3: CFTC long positions Figure 4: CFTC short positions

Source: KCTL & Bloomberg Source: KCTL & Bloomberg

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Non Commercial Long Positions Commercial Long Positions

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Figure 2: Crude oil price movement

Source: KCTL & Bloomberg

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MCX Price(LHS) NYMEX Price(RHS)

continued till end of second quarter. European Government agreed for bailout of Greece in the month of May.

Euro-zone debt crisis helped U.S dollar index to surge by 6 to 8 per cent in the month of June thus made oil to

trade lower during Q2CY2010. Like US, the European Central Bank (ECB) conducted a “Stress test on European

Banks” to test �inancial stability of the banks and result was quite impressive. The result was out of 91 banks 7

banks failed (i.e., not ready to survive in adverse conditions). The US Federal Reserve Bank announced purchase

of assets worth $600 billion for Quantitative Easing (QE).

Currency and commodities emerged as a safe haven

appeal for investors in CY 2010. Sovereign country like

Ireland debt concern was also sorted out as IMF and

Europe Government together agreed for $89 billion

bailout. Chinese government took stringent measures

to bring out its economy from overheating. The People’s

Bank of China, raised banks’ reserve requirement ratio.

This move had a little bearish impact on the commodity

market, as China has emerged as largest consumer

of commodities in recent time. Geopolitical concern

like Korean War created black cloud for some time in

the market. Increasing GDP �igure of major countries

suggests a mending global economy.

Figure 5: Crude oil price vs. Dollar Index

Source: KCTL & Bloomberg

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NYMEX Oil Price(LHS) Dollar Index(RHS)

ENERGY

33

Fundamental drivers

Summer and winter are the two major demand driving seasons in US. Change in demand for crude oil leads to

�luctuation in production. Winter season in US—running between October and March—help oil prices to gain.

However, during peak winter season of CY10, crude oil prices failed to move higher due to weak economic

growth and also moderate winter. Meantime, summer driving season demand was also below-the-expectation

thereby made oil market to move in a very thin range. The National Oceanic and Atmospheric Administration

(NOAA) had projected 14-23 named storms for 2010. However, total 19 named storms were formed, third

highest number after 1887 and 1995 and 12 storms became hurricane, which is second highest after 1969. Five

of those reached major hurricane status of Category 3 or higher. Nevertheless, oil prices had no major impact

on oil prices. Crude oil prices showed a marginal rise in July as Hurricane Alex, Storm Bonnie and Colin hit the

Gulf of Mexico and had a very little eff ect on production. Crude oil prices rose once again in September following

production threat by Hurricane Igor and Julia. However, little positive impact was witnessed through tropical

storm Tomas in October end. Crude oil production between June and August average at 47,000 barrels per day

in US, which was about half of EIA’s forecast of 96,000 barrels per day. Thrilling winter at the end of the year

boosted heating oil demand in the US, thus keeping the price trend higher.

Total crude oil inventory level was higher in 2010

than last year as oil produced extracted more oil on

speculation that demand would rise during hurricane and

summer driving season. As per US Energy department,

total crude oil inventory stands at more than 350000

million barrels as on �irst week of December. However,

product inventories like Gasoline inventory had been on

declining trend since August and by December it fell by

3% while distillate inventory rose by 1%.

Average re�inery utilization in 2010 stood at 87% as

against 83% in 2009. Capacity utilization was highest

in June and July as companies were prepared to meet

possible production disruption during hurricane

season. Thus, a rise in inventory was witnessed during that period. The US total oil and rig counts climbed to

two year’s high by reaching 1723 Bcf. Similarly, total oil rig counts rose to �ive years’ high.

World oil demand and supply

Faster-than-expected recovery in the world economies in CY10 created good demand of crude oil. In CY2010, oil

consumption rose in US and North America; however, OECD Europe is still showing contraction in oil consumption.

Higher growth rate was seen in developing countries like China and India. Oil consumption demand is likely to

expand in OECD countries in CY2011 backed by stimulus package provided by respective nations. Growth in GDP

with increasing industrial activities and auto sales will also boost the demand for fuel consumption in the US. Major

OECD European countries like Germany, France, Italy and UK have gone through a lower demand, despite various

Figure 6: Crude oil price vs. Total crude oil inventory

Source: Bloomberg and EIA

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Total Crude Oil Inventory Price

Major Indicators US China Japan India Europe

GDP 2.50% 9.60% 0.90% 8.90% 0.40%

In�lation Rate 1.20% 4.40% 0.20% 9.70% 1.90%

Jobless Rate 9.80% 4.20% 5.00% 8% 10.10%

Current Account -123 70500 1960 -14 -25

Trade Balance -0.44 27 82 -91 -43

Industrial Production 5.3 13.1 11.1 4.4 5.2

ENERGY

34

economic stimuli. Peak winter demand in Europe has

created a strong demand for oil, so, contraction of oil

consumption in OECD Europe countries are expected

to be lower. OPEC is expecting 6.7% rise in Chinese

crude oil demand, which is about 8.8 mb/d. However,

Asian oil demand is revised to be slightly low for the

coming year. As per OPEC, Overall world oil demand is

forecast to increase by 1.2mb/d, upward revision from

85.9 to 87.1 million barrels per day.

Fundamental outlook

We project crude oil to trade higher in CY2011 on

strong fundamental factors and recovering global

economy. Seasonal demand like winter (between

October to March), then summer driving (June to September) and Hurricane season (July to November)

together are expected to boost oil price movement. However, in lean period i.e. in second quarter of the

year, oil prices may fall in the absence of any boosting fundamentals. In December—second month of winter

season—oil prices hovered in the range of $87.25 to $89.25. Heating oil demand is on cloud as thrilling winter is

creating demand in the US and Europe. Currently, heating oil prices are trading around $254 per gallon, which

is at two years’ high. In 2010, heating oil prices climbed more than 8%. Winter demand is expected to rise in

Q1CY2010 leading to strong demand for crude oil. Major global economies are in the stage of improvement.

Increasing Industrial production, manufacturing activities, improving employment with recovering GDP of the

major countries are likely to push oil higher. Debt concern in Euro-zone countries are on the way of relieving

through European Stability Mechanism, thus improvement in European economy may help oil prices to trade

on a higher note.Thus; crude oil consumption is expected to rise, on the basis of improving demand. As said

above the economies are already in a revival form and expected to be same in the coming year. This may create

a fresh summer driving demand in the CY2010. Obviously impact of hurricane season can not be ruled out.

Crude oil Elliot wave analysis

Crude oil Nymex: Buy at $82-87

TP $113 then $120 SL $68

Crude oil MCX: Buy at 3900-3960

TP 4430 then 4700 SL 3400

Outlook: Crude oil Nymex future

prices are projected to trade

higher for the year 2011 levels.

As per our analysis market took a

complex correction for cycle 2 and

we ended at $64 levels. However,

currently market has breached

the resistance at $87.09 levels

(Previous swing high) and currently trading above the same suggests upside potential for medium to long term.

After witnessing a low of $64 levels market started rising and considered as fresh trend with undefined wave.

The upside potential for the year 2011 is expected to $103 then $120 levels. The key support level to watch is at

$76 levels sustain above would lead the prices to gain further. We from KCTL see the crude oil prices to gain

and recommend buying.

Figure 7: World crude oil production and consumption

Source: Bloomberg and EIA

83

84

85

86

87

88

Y10Q1 Y10Q2 Y10Q3 Y10Q4 Y11Q1 Y11Q2 Y11Q3 Y11Q4

Production Consumption

ENERGY

35

After the severe drought conditions in many parts of the country last year, India witnessed a successful monsoon

season in 2010. Indian Meteorological Department—a national agency for weather forecasting—in its �irst South

West monsoon forecast report in April 2010 projected India will receive 98% of Long Period Average rainfall.

The southwest monsoon crossed the Indian coast a day prior to the normal onset date (May 31, 2010), and its

progress was quite good initially. There was, however, a three-day stagnancy, following which the monsoon

revived quickly to enter the southern parts of central India on time (i.e., by mid-June). But post its entry into

south Gujarat and south Madhya Pradesh, the southwest monsoon once again become inactive for about 10

days. This period of rainfall de�iciency resulted in a sowing activity slowdown across major areas of central

and northern India. In the latter half of June, the Met

stated that rainfall was expected to be better than the

earlier forecast—that is, 102% of the LPA against 98%

of the LPA (with a model error of +5%) estimated in

April 2010. In the second half of July, the country as a

whole received excess rainfall, with some parts of India

witnessing a �lood-like situation. With improvement in

monsoon activity, the sowing process gathered steam

across India. Late July, August and September were very

active months wherein the country as a whole received

good rainfall barring north-east region. For August

and September, the rainfall was projected at 107% of

LPA with a model error of +7%. For September, rainfall

was projected at 115% of LPA with a model error of

+15%.

Rainfall

The monsoon rainfall for the country as a whole during

June to September season was 2% above normal. In

quantitative terms, total rainfall was 912.8 mm against

the normal of 893.2 mm. Of the total 36 subdivisions,

the rainfall was excess in 3; normal in 10 and de�icient

in 23 regions.

From an acreage perspective, the year 2010 proved to

be good for agriculture. The above-normal rainfall and

timely availability of inputs resulted in a marginal-to-

sharp rise in acreage over last year. The major increase

in area was seen in sugarcane, which rose 20.42% Y/Y,

followed by pulses (20.36%). Cotton acreage also rose

considerably by 8.87% as farmers were attracted by

the higher price realization last season. Clearly, there

has been a shift in acreage from oilseeds to pulses and

cotton, with oilseeds acreage increasing marginally by

Eventful monsoon 2010

Table 1: India rainfall—Actual, normal and deviation

Actual Normal Change (%)

East and North-East India 1175.8 1436.2 -18%

North-West India 688.2 613.0 12%

Central India 1027.9 991.5 4%

South Peninsula 853.6 722.9 18%

All India 909.3 885.1 3%

Source: IMD

Table 2: Kharif crop acreage Lakh hectares

2009 2010 % Change

Rice 330.3 351.17 6.32

Maize 70.97 75.84 6.86

Jowar 30.93 30.55 -1.23

Bajra 85.18 86.38 1.41

Total Cereals 536.46 563.33 5.01

Arhar 32.5 43.83 34.86

Moong 23.65 26.89 13.70

Urad 21.68 24.06 10.98

Total Pulses 94.62 113.88 20.36

Soybean 95.82 93.34 -2.59

Castor 7.63 8.87 16.25

Ground nut 44.49 49.63 11.55

Sun�lower 5.66 2.74 -51.59

Sesamum 17.39 16.81 -3.34

Niger 2.87 3.29 14.63

Total Oilseeds 173.85 174.68 0.48

Sugarcane 42.02 50.6 20.42

Jute 6.92 7.59 9.68

Cotton 98.79 107.55 8.87

Source: Ministry of Agriculture, GOI.

AGRI COMMODITIES

36

0.48% Y/Y. Among cereals, rice and maize acreage increased considerably as the key growing regions of these

crops received good amount of rainfall.

According to the �irst advanced-estimate report released by the Union Farm Ministry, rice production is likely to

increase by 5.9% Y/Y, to 80.41 million tonnes. Moreover, coarse cereals production, which includes maize, barley

and jowar, is likely to rise by about 20% Y/Y, to 28.23 million tonnes. Total coarse cereals production including

rice likely to increase by 9.14% Y/Y to 108.64 million tons. Since the acreage under pulses cultivation increased

20% Y/Y, the production is expected to rise by 40% Y/Y to 6 million tons. According to government data, soybean

production is likely to fall by 2.4%, although industry expects an increase in production this year.

India is likely to enjoy a bumper cotton crop this year. Farmers planted more cotton this year as they were

attracted by higher prices for the produce last season. Moreover, climatic conditions were quite favorable for

crop growth. However, there have been reports of crop damage in a few kharif pulses, although the extent of

damage is yet to be ascertained.

Table 3: First advanced estimate of kharif crops Million tones

2009-10 2010-11

Crop 2008-09 1st advanced estimates 4th advanced estimates Targets 1st advanced estimates

Rice 84.91 69.45 75.91 87.00 80.41

Jowar 3.05 2.55 2.82 4.10 3.22

Bajra 8.89 5.83 6.50 10.00 8.61

Maize 14.12 12.61 12.00 15.50 14.06

Ragi 2.04 1.48 1.96 2.50 1.93

Small Millets 0.44 0.29 0.35 0.50 0.40

Coarse Cereals 28.54 22.76 23.63 32.60 28.23

Cereals 113.45 92.21 99.54 119.60 108.64

Tur 2.27 2.47 2.55 2.74 3.27

Urad 0.84 0.88 0.85 - 1.08

Moong 0.78 0.52 0.44 - 0.88

Other Kharif Pulses 0.80 0.55 0.46 - 0.76

Total Pulses 4.69 4.42 4.30 5.71 6.00

Total Foodgrains 118.14 96.63 103.84 125.31 114.63

Groundnut 56.17 45.28 36.59 72.21 56.36

Castorseed 11.71 9.46 9.85 11.39 9.45

Sesamum 6.40 5.52 6.57 7.50 6.23

Nigerseed 1.17 0.71 1.01 1.65 1.06

Sun�lower 3.57 2.07 2.16 4.92 1.56

Soyabean 99.05 89.30 100.46 109.32 98.07

Total Oilseeds 178.08 152.33 156.63 207.00 172.74

Cotton 222.76 236.57 239.35 260.00 335.00

Jute 96.34 96.98 107.00 105.00 96.86

Mesta 7.31 5.45 5.91 10.00 5.96

Jute & Mesta 103.65 102.43 112.91 115.00 102.82

Sugarcane 2850.29 2494.82 2777.50 3150.00 3249.12

Source: Ministry of Agriculture, GOI.

AGRI COMMODITIES

37

Minimum support price

Along with favourable weather condition, signi�icant hike in MSP of kharif crops also attracted farmers to

grow more crops this year. Among the crops, pulses are getting enough leverage as MSP of all the pulses have

increased substantially in last three years. Here the question arises that will the rise in MSP increase production

or will it contribute to rising in�lation? On one hand, the rise in MSP certainly attracts farmers to grow more

so that concerns of food insecurity, sky-rocketing of food prices and India’s dependency on import would be

minimized. While on other hand, the MSP is becoming benchmark price for the spot market. Traders are not

bringing the price of any commodity below this level. Hence, it will certainly lead to food in�lation.

Table 4: Minimum support price over the years

2007-08 2008-09 2009-10 2010-11 % Change over 2009-10

Paddy (Common) 745 850 950 1000 5.26

Paddy (Grade A) 775 880 980 1030 5.10

Jowar (Hybrid) 600 840 840 880 4.76

Jowar (Maldandi) 620 860 860 900 4.65

Bajra 600 840 840 880 4.76

Maize 620 840 840 880 4.76

Ragi 600 915 915 965 5.46

Arhar (Tur) 1590 2000 2300 3000 30.43

Moong 1740 2520 2760 3170 14.86

Urad 1740 2520 2520 2900 15.08

Chana 1445 1600 1760 2100 19.00

Lentil (Masur) 1545 1700 1870 2250 20.00

Cotton Medium Staple 1800 2500 2500 2500 0.00

Cotton Long Staple 2030 3000 3000 3000 0.00

Groundnut-in-shell 1550 2100 2100 2300 9.52

Sun�lower 1510 2215 2215 2350 6.09

Soybean (Black) 910 1350 1350 1400 3.70

Soybean (Yellow) 1050 1390 1390 1440 3.60

Sesamum 1580 2750 2850 2900 1.75

Nigerseed 1240 2405 2405 2450 1.87

Source: MOA, GoI

Among the Kharif crops, pulses are most attracted group by the country. Though India is largest pulses producing

country, its output is not enough to meet the consumption demand. Hence, India is depending on import of many

pulses. On an average, India’s annual pulses production is around 14-15 million tonnes, but, the consumption

demand is for 19-20 million tonnes. Looking into India’s demand, the government is trying to increase production

and productivity so that import dependency would come down. To increase the production, central government

announced a special package of `300 crore for establishment of 60,000 Pulses and Oilseeds villages in rain-fed

areas. The government has been increasing the MSP signi�icantly for pulses compared to other crops to attract

the farmers. For 2010, the MSP has been hiked between 10-30% for pulses against 0-10% for other crops.

Cereals consisting of wheat, rice, bajra, jowar and maize is another most important sector. Cereals are considered

as essential commodities. Cereal group is having 4.4% weightage in total Wholesale Price Index, hence, sharp

rise in price will lead to rise in in�lation. Considering last year’s sharp fall in rice production, central government

hiked the MSP of rice to Rs.1000 per quintal for common grade and ̀ 1030 per quintal for A-grade. Over last four

years, the MSP of rice has been increased by 34%.

AGRI COMMODITIES

38

Soybean

The soybean futures on Indian exchanges were on a bearish note in �irst half of 2010 on selling pressure backed

by weak demand for the produce. Poor export demand for Indian soy meal during this period from South East

Asian countries had a bearish eff ect on the Indian market amidst lower production in 2009-10 season. Soy meal

export in FY10, fell 49% Y/Y to 2.11 million tons—lowest in last 5-years—due to global economic slowdown and

lower domestic production. Key importing nations were away from active buying from India because of higher

price compared to other major producing countries i.e.,

Brazil and Argentina. Indian soybean production was

lower at 85 lakh tons in 2009-10 against 89 lakh tons in

2008-09. Poor monsoon activity in 2009 has resulted

into lower production. Lower demand for meal and

oil had resulted into negative crush margin prompting

crushers to slow down their bean purchases. The crush

margin remained on a negative side since beginning of

2009 crushing season. This was because of lower price

of meal and oil and higher price of bean. Negative crush

margin continued August-end thus provoking domestic

crushers to stay away from active buying.

Oil and Oilseeds: Destined to be bullish

Figure 1: NCDEX soybean price movement (`/quintal)

Source: Bloomberg and KCTL Research

Fig 2: Change in soy meal export (% change M/M)

Source: SEA and KCTL Research

-54%-41%

-27%-40%

-21%-10%

186%

38%

69%84%

49%

86%

-100%

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150%

200%


1850

1950

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10

1/1

5/2

01

0

1/2

9/2

01

0

2/1

2/2

01

0

2/2

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01

0

3/1

2/2

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0

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01

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4/9

/20

10

4/2

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01

0

5/7

/20

10

5/2

1/2

01

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6/4

/20

10

6/1

8/2

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0

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/20

10

7/1

6/2

01

0

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/8/2

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10

/22

/20

…

11

/5/2

01

0

11

/19

/20

…

12

/3/2

01

0

Fresh arrival pressure, poor mealexport demand and negative crushmargin prompted weak demand fromcrushers amidst lower production for2009-10

India's soybean production in2009-10 was 8.5 million tonsvs. 8.9 million tons in 2008-09

Indian soy meal export in FY10 fell 49% Y/Y to 2.11 million tons

Higher production expectation onhigher acreage and favourableweather condition

Higher production estimates:COOIT projected soybeanproduction at 9.35 MMT Vs. 8.5MMT

Fresh meal export orders, positivecrush margin, at-par internationalprice

For FY11, COOIT estimated soy meal export at 3.2 million tons

AGRI COMMODITIES

39

In �irst half of 2010, Indian soy meal export prices were higher as compared to other countries due to higher

input cost and lower production in 2009-10. Indian soy meal price was quoting around $30-50 per ton higher

than Argentina and $20-30 per ton of Brazilian price. This has resulted into sluggish demand from South East

Asian countries. Moreover, Argentina came out of worst drought situation of 2008 (seen in last four decades)

and its production rose 70% Y/Y making that country to off er soy meal at much lower prices. Beginning from

second half of the year, Indian soy meal prices started to become at par with international price as Indian

traders off ered at lower on anticipation of fresh and bumper crop expectation.

Another major bearish factor for the market was record import of edible oils. India imported a huge quantity of

oil to meet its consumption as domestic production fell sharply. In the oil year 2009-10 (November to October),

soy oil import rose 68% Y/Y to 1.66 million tons. Higher import of edible oil and lower export of meal in �irst

half of the year had a bearish impact on the market. Lower international price at beginning of 2010 and nil

import duty on crude edible oil has resulted into record import.

0

100000

200000

300000

400000

500000

600000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

2009 2010

Figure 3: Month wise soy meal export from India (in MT)


Figure 4: Soy meal price comparison ($/MT)

250

300

350

400

450

500

550

4-J

an

25

-Jan

15

-Feb

8-M

ar

29

-Mar

19

-Ap

r

10

-May

31

-May

21

-Ju

n

12

- Ju

l

2-A

ug

23

-Au

g

13

-Sep

4-O

ct

25

-Oct

15

-No

v

6-D

ec

India Argentina Brazil


Figure 5: Crush margin (`/MT)

Outlook

The year 2011 is expected to be very good year for India soybean futures market. It may turn as best investment

option for Indian traders and investors. India is likely to export record soy meal in the current �iscal on higher

production. Indian meal prices are lower than other countries, hence, may attract key importing nations to

import more meal. Indian traders are getting good meal export orders as our prices are quoting at discount to

Brazil and Argentina (around $5-6 per ton lower). During April to November 2010, soy meal export from India

rose 80% Y/Y to 395,510 tons. In FY11, meal export from India is likely to be higher compared to last year.

Figure 6: Soy oil import (in MT)

Source: Bloomberg and KCTL Research Source: SEA and KCTL Research

-1400

-1200

-1000

-800

-600

-400

-200

0

200

400

600

1-Ja

n-10

25-Ja

n-10

19-F

eb-1

0

17-M

ar-1

0

12-A

pr-1

0

7-M

ay-1

0

1-Ju

n-10

24-Ju

n-10

17-Ju

l-10

10-A

ug-1

0

3-Se

p-10

29-S

ep-1

0

23-O

ct-1

0

19-N

ov-1

0

13-D

ec-1

0

AGRI COMMODITIES

40

The Central Organization for Oil Industry and Trade (COOIT) has projected India’s soy meal export would be 3.4

million tons against 2.1 million tons shipped last year. Domestic crushers are coming out from negative crush

margin witnessed last year, which may attract active buying from them. Furthermore, international markets

are expected to remain bullish on supply demand mismatch. Weather aberration in key soy growing countries

is disturbing the world balance sheet. USDA has cut its bean production and ending stocks for two consecutive

months on October and November. The season in US is over and world oil market is closely watching movement

in Latin America. Latin American countries are witnessing dry weather condition, which is posing threat to the

crop. For 2010-11, USDA has projected world soybean production at 257.78 million tons against 260.09 million

tons last year. Indian market will take fresh cues from June onwards when new monsoon season starts. Price

movement will depend on area, yield, production and most importantly weather condition.

Figure 7: CBOT soybean price movement


900

950

1000

1050

1100

1150

1200

1250

1300

1350

1/4/

10

1/18

/10

2/1/

10

2/15

/10

3/1/

10

3/15

/10

3/29

/10

4/12

/10

4/26

/10

5/10

/10

5/24

/10

6/7/

10

6/21

/10

7/5/

10

7/19

/10

8/2/

10

8/16

/10

8/30

/10

9/13

/10

9/27

/10

10/1

1/10

10/2

5/10

11/8

/10

11/2

2/10

12/6

/10

CBOT soybean futures were range bound on poor demand and fresh

supply from South America

Soybean production in 2009-10:US rose 13% Y/Y; Brazil by 19%

and Argentina 70% on favourable weather condition

Prices started moving higher on robust export demand from China

following production fall in that China

USDA lowered US soy production and ending stock estimates for 2-consecutive months in October and November due to bad weather

condition that affected yield level. It also raised export projection

Tighter oilseed balance sheet for 2010 due to fall in supply and rise in

demand for food, feed and fuel

The CBOT soybean futures rallied 23% YTD (as on 10th December 2010) based on bullish fundamental factors.

In �irst half of CY10, soybean futures were trading in a thin range on fresh supply of the produce from South

America and on poor demand from major importing nation. A bumper crop harvest projection for Brazil and

Argentina for 2010 had a bearish eff ect on the market. South American countries came out from worst-ever

drought of 2008 and their soybean production increased signi�icantly. Brazil’s production rose 19% Y/Y in

2009-10 to 69 million tons and Argentina output surged 70% Y/Y to 54.5 million tons. Beginning from June,

the bean prices on Chicago Board of Trade started its northward journey on emergence of strong demand led

by China. Though the world production was higher, rising demand for food, feed and fuel resulted into rally

in the prices. Supply demand mismatch for world soybean also triggered the rally in the prices. For 2010-11,

world soybean supply is projected to increase by 5.77% Y/Y while consumption is likely to increase by 7.41%.

In 2010, US soybean acreage rose marginally by 1.13% Y/Y as farmers shown more interest in soy planting.

Moreover, favorable climatic conditions also supported more planting. However, during critical growth stage,

weather condition was not supportive, which resulted into lesser yield level. United States witnessed hot and

dry weather condition in September. As a result of this, National Agriculture Statistics Services division of USDA

AGRI COMMODITIES

41

lowered US soybean production by 2.15% M/M in October to 3.40 billion bushels (1 bushel = 27.2 kg). It also

lowered ending stock projection by 24% M/M to 265 million bushels and export projection was raised by 2.36%

to 1.52 billion bushels. It further lowered production and ending stock projection in November month as well,

which instigated a rally in CBOT soy market.

China continued to remain top importer of soy and its derivatives as its soy crop output was marginally lower

than previous year. Its growing consumption demand for food, feed and fuel resulted into higher import of

soybeans. According to Chinese General Administration of Customs, the nation’s soybean import during January

to November rose 31% Y/Y to 49.4 million tons.

Table 5: World soybean balance sheet (in MMT)

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Area (in MHA) 92.92 94.26 90.67 96.40 101.95 103.10

Beginning Stock 48.17 53.28 63.08 52.86 44.02 60.41

Production 220.67 237.13 221.01 211.96 260.09 257.78

Import 64.13 69.07 78.13 77.18 87.63 96.17

Total Supply 332.96 359.47 362.21 342.00 391.74 414.36

Export 63.55 70.81 78.77 76.85 92.78 98.00

Crush 186.14 196.08 202.75 192.91 209.44 225.78

Food Use 13.45 13.90 14.02 14.25 14.73 15.33

Feed Use 16.55 15.61 13.81 13.97 14.38 15.12

Total Consumption 216.14 225.58 230.58 221.13 238.55 256.24

Ending Stocks 53.28 63.08 52.86 44.02 60.41 60.12

Table 6: Soybean balance sheet (in MMT)

Beginning Stock

Production Import Total Supply

Exports Crush FeedUse

Total Consumption

Ending Stock

Argentina

2008-09 21.76 32.00 1.24 55.00 5.59 31.24 1.58 32.82 16.59

2009-10 16.59 54.50 0.00 71.09 13.09 33.96 1.60 35.56 22.45

2010-11 22.45 52.00 0.00 74.45 13.00 39.30 1.65 40.95 20.50

Brazil

2008-09 18.90 57.80 0.04 76.74 29.99 31.87 2.85 34.72 12.04

2009-10 12.04 69.00 0.17 81.21 28.58 33.67 2.90 36.57 16.06

2010-11 16.06 67.50 0.18 83.74 31.40 34.50 3.00 37.50 14.84

China

2008-09 4.25 15.54 41.10 60.88 0.40 41.04 1.70 51.44 9.05

2009-10 9.05 14.70 50.34 74.09 0.18 48.83 1.75 59.43 14.47

2010-11 14.47 14.40 57.00 85.87 0.45 57.80 1.85 68.85 16.57

US

2008-09 5.58 80.75 0.36 86.69 34.82 45.23 2.88 48.11 3.76

2009-10 3.76 91.42 0.40 95.58 40.85 47.67 2.94 50.61 4.11

2010-11 4.11 91.85 0.27 96.24 43.27 45.31 3.17 48.48 4.49

Outlook

The CBOT soybean futures are projected to trade higher in 2011 on bullish demand outlook. World production

projection is lowered by 0.90% for 2010-11 season and consumption is projected to rise by 7.41%. Supply

demand mismatch is likely to rule the market. New season has started in Brazil and Argentina. Brazilian sowing is

completed while 90% of the sowing is completed in Argentina. Remaining planting in Argentina is halted because

of insuf�icient soil moisture due to hot and dry weather condition. If the hot and dry weather condition continues

AGRI COMMODITIES

Source: USDA and KCTL Research

Source: USDA and KCTL Research

42

in January it may aff ect planting and growth of the crop, which may lower the production. In December month

World Agriculture Supply and Demand Estimates report, USDA has lowered 2010-11 world soybean production

forecast to 257.78 million tons from 260.09 million tons in 2009-10. Major fall is projected for Brazil and Argentina

due to dry weather condition. Output in Brazil and Argentina is likely to fall to 67.50 and 52 million tons from 69

and 54.50 million tons respectively. China is likely to continue remain as world’s largest consumer of soybeans.

In 2010-11, its consumption is forecast to grow by 16% Y/Y. To meet surging consumption demand, imports

are likely to increase by 13% Y/Y. In late 2010, China sold few quantities of oil and oilseeds from its reserve in

order to rein rising prices thus making their granaries with less stocs. Hence, the country may go for aggressing

imports to meet its consumption demand. World soybean balance sheet is likely to become tighter in 2011 on

weather aberrations in many countries. Most of the western economies are adopting a policy of use of bio-fuel.

Apart from food and feed, oilseeds are also being used as fuel. Hence, fuel demand is likely to boost the price rise

in 2011. Sowing in Brazil was completed slightly delayed compared to normal period, but, in Argentina sowing

was done in 90% of the area till end of December. According to weather agencies, Argentina is continue to witness

hot and dry weather condition in near term, which may impact sowing activity. According to Buenos Aires Grain

Exchange, Argentina farmers have planted 90% of soybean crop as on last week of December. World oilseed

traders are worried about soybean supply from Argentina. Argentina crop production is projected at 52 million

tons against earlier estimate of 54 million tons. The present weather condition in Argentina is looking similar to

2008 condition when soybean production fell to 32 million tons against 46.1 million tons in previous year. If the

hot and dry condition continues for some more time, Argentina farmers may give up remaining planting.


Recommendation: Buy in the range 1230-1260 TP 1490 then 1600 SL 1100

Soybean NCDEX: Buy at 2150-2250 TP 2720 then 2900 SL 1870

CBOT soybean future prices are expected to be on bullish note in 2011. Recently market has completed cycle

2 at 926 levels and currently it’s in fresh trend. As per the analysis market is in Cycle 3 which is likely to bring

the rally in prices for long term. Market is in intermediate wave (1) of primary wave 1 of cycle 3. The upside

potential is seen till 1490 for short to medium term. The key support level to watch is at 1080 levels for 2011.

Overall, analysis suggests market is likely to remain higher and recommend buying for the year 2011. We from

KCT expect CBOT soybean prices to gain and recommend buying.

AGRI COMMODITIES

43

Refined Soy Oil

The re�ined soy oil futures were on a bearish trend in �irst half of CY2010 on weak demand for the produce

amidst lower production of soybean in 2009-10. Due to lower production of bean in 2009-10, India imported

more oil to meet the domestic demand. Bearish trend in world veg oil market because of bumper crop in US,

Brazil and Argentina had a spillover eff ect on Indian market. These countries were off ering their oil at much

lower price in international market. Lower international prices and import friendly policies led to record import

of oil. India meets 55% of its soy oil demand through imports largely from Brazil and Argentina. Considering

rally in edible oil price in 2008, Indian government took stringent measures to ensure suf�icient supply of oil in

India. It banned export of edible oil and slashed import duty to zero on crude edible oil from 45-52%. As a result

of all these measures, India’s oil import surged to record levels. According to the Solvent Extractors Association

of India, soy oil import in the oil year 2009-10 surged 68% Y/Y to 1.66 million tons.

The oil futures started moving higher beginning from July moving in sync with international market. Indian

traders and investors were on buying spree amidst higher inventory and imports. International edible oil prices

showed a rally on robust demand for oil as food and fuel. Rise in crude oil prices also gave a kind of cushion to

the market. There was a sharp rise in consumption demand for oil especially from China and India. Import of

these two countries drove the world edible oil market. World edible oil balance sheet became tight on supply

crunch from major producing countries due to unfavourable weather condition. With the rise in international

oil price, the landed price started moving up, hence, supported the domestic market to trade higher. However, in

late August and early September, soy oil futures on Indian market took a smart correction following projection

of bumper crop based on higher acreage and favourable weather condition. Before start of harvesting season,

India’s soybean production was estimated at 10.3 million tons against 8.5 million tons produced last year. Later,

this �igure was revised to 9.35 million tons. Bumper crop projection and higher inventory of oil kept the Indian

oil market under pressure.


430

450

470

490

510

530

550

570

590

1/1/

10

1/15

/10

1/29

/10

2 /12

/10

2/26

/10

3/12

/10

3/26

/10

4/9/

10

4/23

/10

5/7/

10

5/21

/10

6/4/

10

6 /18

/10

7/2/

10

7/16

/10

7/30

/10

8/13

/10

8/27

/10

9/10

/10

9/24

/10

10/8

/10

10/2

2/10

11/5

/10

11/1

9/10

12/3

/10

Higher import of edible oil due to lower international price and nil

import duty kept the Indian soy oil futures under pressure

1. Prices rose on emergence of active demand2. Rally in international market on supplydemand mismatch supoprted the price rise

Commencement of fresh arrivals and start domestic

crush led the correction

1. International markets staged a rally on tight supply and robust export demand2. Rally in crude oil prices also supoprted the price rise3. Higher landed price in imported oil attracted more buying in India

Fig 8: NCDEX soy oil price movement (`/10 kg)

AGRI COMMODITIES

44

Beginning from October, Indian soy oil witnessed an uninterrupted rally on strong buying interest from local

traders and investors. Though spot markets were witnessing huge in�low of the produce during this period, prices

were on rising trend based on strong overseas market. CBOT soy oil futures were on Bull Run on expectation

of lower soy crop and robust oil demand from key consuming nations. Weather aberrations in key producing

countries had an adverse impact on the production.

The United States Department of Agriculture lowered

US soybean production estimates for two consecutive

months on lower yield aff ected by poor weather.

Furthermore, dry weather condition in Argentina in

December had an adverse eff ect on planting and growth

of the crop. Indian traders bought futures in December

on anticipation of soy oil imports might shrink from

Argentina. Argentina is the largest supplier of soy oil

to India. If the dry weather condition prevails for more

days, it may aff ect crop size. Indian soy oil futures surged

to their highest level since March 2008.

From the above graph, we could infer that landed

price of soy oil from Argentina and Brazil was lower

compared to domestically produced oil. This is because

international prices were ruling lower on bumper

crop expectation in those countries. Due to nil import

duty and lower international price, landed price of soy

oil was much lower compared to other countries. This

attracted heavy imports into the country.

India’s soy oil production hovers in the range of 1.0-1.5

million tons annually whereas consumption is around

2.5-3.0 million tons. Oil produced from the domestic

crushing meets only 45% of the annual consumption

and remaining 55% is being imported. Soy oil import in India has been showing an increasing trend over last

couple of years. Rising consumption demand as food and industrial purpose is leading to heavy imports.

Outlook: Karvy Comtrade expects a BULLISH TREND for re�ined soy oil futures market in the year 2011. World

edible oil balance sheet is likely to get tighter in �irst half of 2011 on possible production decline in major

producing countries. US soybean production has missed the earlier estimates due to bad weather condition.

In December month World Agriculture Supply and Demand Estimates, US soybean production for 2010-11 is

estimated at 91.8 million tons. In September, USDA had estimated the output at 94.37 million tons. Dry weather

condition in October and November resulted into lower yield levels, hence, production declined substantially.

Brazil and Argentina—second and third largest soy producer after US—also witnessed a poor weather

condition during sowing time. Tight world veg oil supply condition is likely to result into a rally in world edible

oil market. Palm oil futures on Bursa Malaysian Derivatives exchange are likely to remain on Bull Run in 2011

on likely production shortfall in Malaysia. Malaysian palm oil production is likely to be around 17.2-17.5 million

tons against 17.8 million tons produced last year. Since the Argentina weather condition is posing threat for its

crop, it may result into lower export of soy products. Large chunk of India’s soy oil import is from Argentina.

India’s soy oil imports are likely to be lower in the medium term, which may attract buying. The season in India

will over very soon and supply pressure will ease from the market. Tight supply and robust demand for veg oil

in India and world market will keep the oil prices on BULL RUN in 2011.


Figure 9 : Soy oil price comparison

250

300

350

400

450

500

550

4-J

an

25

-Ja

n

15

-Fe

b

8-M

ar

29

-Ma

r

19

-Ap

r

10

-Ma

y

31

-Ma

y

21

-Ju

n

12

-Ju

l

2-A

ug

23

-Au

g

13

-Se

p

4-O

ct

25

-Oct

15

-No

v

6-D

ec

India Argentina Brazil

AGRI COMMODITIES


Figure 10: Soy oil import (Nov-Oct)

45

Elliot wave analysis: CBOT Soy Oil

Recommendation: Buy at 49-51 TP 62 then 68 SL 40

Soy oil NCDEX: Buy at 590-610 TP 695 then 730 SL 530

CBOT Soy oil future prices are projected to gain for the year 2011 after a lower correction. As of now market

is in intermediate wave (1) of primary wave 1 of cycle 3. The downside potential could be seen till 51.7 or it

can extend till 48.68 levels considered as intermediate wave (2). Thereafter market is likely to rise, which is

considered as intermediate wave (3). The upside potential is seen till 62 levels or till 68 levels. The key support

level to watch is at 42 levels for the year 2011.

Overall, analysis suggests market is likely to see a correction initially, which would be considered as good

opportunity for going long.

Mustard seed

The mustard seed futures were on a bearish trend in �irst quarter of 2010 on strong selling pressure backed

by weak demand for the produce. Active mustard harvesting season and fresh in�low of the produce to the

spot markets had a bearish impact. The market came under the pressure of higher carry-forward stocks. At

the beginning of 2009-10 season, carry-forward stocks in India were estimated at 10 lakh tons. Furthermore,

weak trend in soy market exerted pressure on the market. In 2009-10 season, India produced 59.2 lakh tons of

mustard seeds against 62.5 lakh tons produced in 2008-09. Drought situation across the country in 2009 led

the sharp decline in acreage and it also hurt the yield level. Negative crush margin during the period due to poor

meal and oil demand also had a bearish impact on the market.

In middle of the year, prices were on a consolidation stage and showed a recovery following lower production

and recovery in meal demand. Ease in arrival pressure from June onwards lent support to recovery in the prices.

Starting from second half the year, meal export demand started picking up following recovery in global economy.

Shrinking stock level because of lower production and robust demand from crushers supported the prices to

rise. However, in monsoon season prices fell once again on expectation of bumper Kharif output. But, in last

quarter of the year, prices rallied on the grounds of encouraging meal export demand and also taking cues from

strong overseas market. Return of crush margin into positive also rendered support to the market.

AGRI COMMODITIES

46

As shown in above table, mustard seed production

fell drastically in Rajasthan on bad weather condition.

Entire north India has suff ered from a drought in

monsoon 2009 thus leaving less moisture in the soil.

Acreage under the crop was also less in 2009-10

season. As a result of lower production, prices were on

uptrend in second half of the year. Mustard seed meal

export witnessed a rise in last three months of the year

on supply threat from other producing countries due

to poor weather condition.

Outlook: In the short to medium term, mustard seed

futures are expected to trade in a bearish note on

expectation of bumper crop. Fresh harvesting season starting from February may have a bearish impact on the

market. According to trade sources, mustard seed production in 2010-11 season is likely to be in the range of

7.0-7.5 million tons against 5.92 million tons produced last year. Excellent monsoon and above normal rainfall

has resulted into higher acreage of mustard seeds. Furthermore, favourable weather condition for the crop

during growth period is resulting into higher yield level. We can expect yield level would be around 1 ton per

hectare against 0.92 ton per hectare. Fresh crop will start hitting the market from mid-February. Carry-forward

stock for 2010-11 is likely to be around 4.0-4.2 lakh tons.

In the long term, prices may turn on a Bull Run on emergence of fresh buying. Once the arrival pressure starts

easing from May onwards we may see rise in the prices. In FY11 and FY12, India is likely to export record oil

meals on bumper crop. Lower meal price is an added advantage for India. World oilseeds balance sheet is likely

to be tight in 2011 on production loss in major producing countries. Latin American countries are witnessing

hot and dry weather condition which has been aff ecting the yield level. Chinese and Canadian mustard crop is

down this year on frost condition.

Recommendation: Buy at 2500-2600 TP 3300-3500 SL 2100


Figure 11: Mustard seed futures price trend

460

480

500

520

540

560

580

600

620

1/1/

10

1/15

/10

1 /29

/10

2 /12

/10

2/26

/10

3 /12

/10

3 /26

/10

4 /9/

10

4/23

/10

5 /7/

10

5 /21

/10

6 /4/

10

6/18

/10

7/2/

10

7 /16

/10

7 /30

/10

8/13

/10

8/27

/10

9 /10

/10

9 /24

/10

10/8

/10

10/2

2/10

11/5

/10

11/1

9/10

12/3

/10

Higher carry-forward stocks and weakness in other oilseeds market led the fall in mustard seed prices

Market was in consolidation on thin supply due to lower

production

Prices rose on robust meal

export demand

Kharif oilseeds harvesting and bumper crop expectation

Rally in international

market supported the rise

Table 7 : State-wise production of mustard seed (in lakh tons)

2009-10 2008-09

Uttar Pradesh 8.00 9.00

Rajasthan 27.00 30.00

Punjab/Haryana 6.75 6.70

Gujarat 3.15 3.60

Madhya Pradesh/Chhattisgarh 8.30 6.50

West Bengal 2.60 2.50

Others 3.40 3.70

Total 59.20 62.00

Source: Sea of India

AGRI COMMODITIES

47

10000

12000

14000

16000

18000

20000

22000

24000

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10

Freash Crop arrival

(50,000 tons)

Good Export Demand

Fresh crop arrivals from other competing countires like Indonesia and Brazil

Tight supply Situation and delay in fresh crop arrivals due unseasonal rains

Lean preiod for arrival

Pepper

Review: Black pepper—known as king of spices—proved itself as king of the agri futures in 2010. Pepper

prices saw an unprecedented rally since beginning of the year on strong buying interest. Pepper futures prices

rallied from `14,230 (in January) per quintal to `23,338 per quintal (in November). In the beginning of the year,

prices were under pressure due to fresh arrivals from the new crop. But, downside was limited on emergence of

active demand from domestic traders as well as exporters. Prices witnessed a gradual rise from April onwards

and were on Bull Run till August on strong global demand and thin supplies in the market.

After witnessing a rally, prices took small corrections during September-October. Fresh crop arrivals from other

major producing countries like Indonesia, Malaysia and Sri Lanka starting from September aff ected global

demand for Indian pepper. However, in early November, price rose on news of lower world production estimates.

In November, International Pepper Community lowered world pepper output estimates to 316,380 tons against

318,662 tons produced last year. End of season in major producing countries like Vietnam, Srilanka, Malaysia and

Indonesia added further bullishness to the market. Futures prices rose reacting to the rally in international pepper

prices. Decline in world production and rise in demand drove the pepper prices to make a new year in CY2010.

Global Scenario

According to International Pepper Community (IPC), world production in 2010 fell 0.71% Y/Y to 316,380

tons. Black pepper production was 251,980 tons while white was 64,400 tons. Domestic consumption in 2010

was estimated at 131,722 tons and export at 237,650 tons. The consumption of major producing nations is

estimated at 92,022 tons for 2010, as against 89,152 tons in 2009. The global exportable surplus is estimated

around 333,092 tons as against 3,68,610 tons in 2009.

Spices: Carving individual path

Source: Bloomberg & KCTL Research

Figure 12 : Pepper Price Movement at NCDEX Platform- 2010

AGRI COMMODITIES

48

Global Demand- Supply Trend

The international trade in 2010 was aff ected, to a cer-

tain extent, when actual exports declined by 11.4% to

2,37,650 tons Y/Y. However, a surprising rise in Viet-

namese and Brazilian exports limited sharp fall in ex-

port from other major producing countries. For 2011,

IPC has projected world pepper production would be

lower by 2%Y/Y at 309,952 tons. Exportable surplus of

producing nations is projected at 324,292 tons in 2011

against 333,092 in 2010. Exports in 2011 are projected

at around 229,710 tons. Internal consumption of pro-

ducing countries is projected at 125,202 tons in 2011.

Indian Scenario

Table 9: Pepper Balance Sheet – World (in tons)

2009 (Actual) 2010 (Estimated) 2011 (Projection)

White Black Total White Black Total White Black Total

Beginning stock 24292 1111194 135486 20965 79259 100224 20810 74632 95442

Production 66900 251762 318662 64400 251980 316380 65320 244632 309952

Import 6927 36243 43170 11450 36760 48210 10200 33900 44100

Domestic Consumption 37565 91043 128608 38655 93067 131722 35745 89457 125202

Exports 39589 228797 268386 37350 200300 237650 44460 185250 229710

Ending stocks 20965 79259 100224 20810 74632 95442 16125 78457 94582

Pepper production in India has been stagnant at around 50,000 tonnes for the last three years. According to the

International Pepper Community (IPC), pepper production in 2011 is expected to decline by 4% Y/Y to 48,000

tons. In 2010, pepper exports from India estimated to lower by 15% Y/Y to 18,050 tons. According to the Spices

Board of India, pepper shipments from India during January-November 2010 were 14,600 tons which is around

88% of exports targeted by IPC.

Table 10: Pepper Balance Sheet - India (in tons)

2009 (Actual) 2010 (Estimated) 2011 (Projection)

White Black Total White Black Total White Black Total

Beginning stock 546 10952 11350 50 11413 11463 0 17413 17413

Production 450 49550 50000 49550 18000 50000 500 47500 48000

Import 813 14419 15232 1250 16750 18000 500 12750 13250

Domestic Consumption 250 43750 44000 250 43750 44000 250 44750 45000

Exports 1509 19758 21267 1500 16550 18050 500 18500 19000

Ending stocks 50 11413 11463 0 17413 17413 250 14413 14663

As per IPC projections, exports from India are likely to increase by 5.2% to 19,000 tons. For year 2010-11

imports are projected to be declined by 26.3% to 13,250 tons which is likely to support domestic market.

Seasonality index: Pepper

Pepper prices seasonal index is prepared by considering data for the last 12 years spot prices. As per the �igure,

pepper prices start moving higher from July onwards due to off -season for arrivals and prices reach their peak

Table 8: Global pepper production (Tons)

Countries 2009 (Actual)

2010 (Estimated)

2011 (Projected)

Vietnam 1,00,000 95,000 1,00,000

India 50,000 50,000 48,000

Brazil 40,700 34,000 35,000

Indonesia 47,500 52,000 37,000

Malaysia 22,000 23,500 25,700

Sri Lanka 13,812 16,730 17,102

Non IPC- Countries 44,650 45,150 47,150

Global 3,18,662 3,16,380 3,09,952

AGRI COMMODITIES

Source: IPC

Source: IPC

Source: IPC

49

in August. After that prices take corrections during

August-September as fresh arrivals starts in major

exporting countries like Indonesia, Brazil, Malaysia etc.

However, in October-November prices bounce back on

winter season demand from US and EU countries. From

December onwards fresh crop arrival starts in India

which pressurize the prices. In Feb-March crop from

major producer Vietnam hits the market which further

add to the down side. Thus, the correction in prices

continues till March starting from December.

Outlook

Global: The global pepper production is expected to

be lower in 2011. The exhausted stocks in key producing countries will lead to a further rise in global pepper

prices. For 2011, production is expected to decrease by 2% Y/Y. Moreover, the productivity of traditional pepper-

producing countries remains low as most of the pepper plantations are at the end of their economic life. Increasing

ready to eat food habit and change in life style in major importing countries may act as a catalyst for pushing prices

on to record high levels. Given the slow growth of pepper production and the exhausted carry-over stocks, prices

may continue to rise in the world market.

Domestic: The Indian pepper prices might witness a bearish trend during Q1CY10 due to the start of fresh

harvesting season in India. The importing nations may stay away from active buying anticipating a good

correction in the market. Generally new arrivals start coming to the market in December. However, this year due

to incessant rains in major growing regions of Kerala harvesting is aff ected and crop is getting delayed. Delay in

fresh arrivals and lower carry over stocks are likely to support the prices. However, the downtrend may not last

for a long time given the tight supply situation in the world market. India might take advantage of being the sole

supplier until harvesting begins in Vietnam in March. The Vietnamese production is projected to be increased

by 5,000 tons Y/Y to 1, 00,000 tons.

Elliot wave analysis: Pepper

Recommendation: Buy at

17500-18000, TP 23000 then

26000, SL 14500

Outlook: As per the Elliot wave

analysis pepper future prices are

likely to see a lower correction

for short term (1-2 months) and

the downside potential is seen till

19900 or it can extend till 17690

levels, which is considered as

primary wave 4 of cycle 1. After

completing its correction market

has the potential to rise for long term (6-9 months) till 23000 then 25000 levels. The key support level to watch

for 2011 is at 18040 levels (Previous swing low).

Overall, we expect pepper future prices to resume its uptrend after a correction and recommend buying at

support levels.

Figure 13: Pepper Price Seasonality

Sources: Spices Board of India & KCTL Research

90

95

100

105

110


AGRI COMMODITIES

50

Jeera

The jeera futures prices were under pressure during January to June 2010 on bumper crop harvest. In 2010,

India’s jeera production rose 17.6% Y/Y to 1.76 lakh tons. There was active selling pressure during February

and March as arrivals to the cash market was on full swing. Thus, jeera prices at futures platform made their

yearly low of `10,710 in mid of March. However, prices started recovering from mid-May on emergence of

fresh buying. The rally was extended till early September. Domestic traders bought jeera from both spot and

futures market on revival in export demand. This has resulted into rally in the prices, which tested a yearly

high of `15,915 in August but failed to cross the all time high of `16,599 (made in Nov 2009) because of higher

production in 2010.

However, from mid September prices started falling

as fresh crop from Syria and Indonesia started hitting

the world market. Reduced export demand due to

Ramadan festival also pressurized the prices. The

weakness started in mid-September extended till

November on expectation of higher acreage following

better monsoon. However, the late withdrawal of

monsoon and unseasonal rains during November

washed away the newly sown crop. Higher-than-

normal soil moisture provoked farmers to shift jeera

acreage to wheat cultivation. As per trade sources,

around 30-50% of the jeera acreage was diverted for wheat cultivation this year. Global jeera production—

except India—in 2010 fell to 48,000,tons from 55,000 tons seen in 2009. The decline in output was reported

due to unfavorable weather conditions at the time of harvesting in Syria.

Figure 14 : Jeera Price Movement at NCDEX Platform- 2010

10000

12000

14000

16000

1-Ja

n-10

25-Ja

n-10

18-F

eb-1

0

15-M

ar-1

0

9-Ap

r-10

4-M

ay-1

0

27-M

ay-1

0

21-Ju

n-10

14-Ju

l-10

6-Au

g-10

31-A

ug-1

0

24-S

ep-1

0

19-O

ct-1

0

11-N

ov-1

0

6-De

c-10

Fresh Crop arrival

Fresh Crop Arrival from Syria and Turkey

GoodDomestic and Export Demand

Resumed sowing activity on improved weather conditions

crop damage due toheavy rains

Lean season demand


Table 11: Global jeera production

CountryProduction in tons

2008 2009 2010

India 1,35,000 1,50,000 1,76,500

Syria 29,000 32,500 20,000

Turkey 6,500 8,000 10,000

China 7,500 8,500 9,500

Iran 4,250 6,000 8,500

Total 1,82,250 2,05,000 2,24,500

AGRI COMMODITIES

Source: Trade sources

51

Global scenario

Of the total world cumin seed production of 2-2.5 lakh tons, India’s contribution is around 75-80% and rest is from

Syria, Turkey, China and Iran. According to production data for 2010, India’s output was 1.76 lakh tons while Syria

and Turkey produced 0.20 and 0.10 lakh tons, respectively. Due to higher output estimates in major producing

countries, exports for Indian jeera started falling from end of July, which ultimately re�lected in prices.

Export demand for Indian jeera

Jeera exports from India witnessed a sharp decline

during 2009-10 following by huge production. In year

2009-2010, 49,750 tons of jeera valued at `54,824

lakh was exported, against 52,550 tons (valued at

`54,400 lakh) during 2008-09. The exports declined

5.3% in volume terms with marginal gain in value

terms compared to the earlier year. It was reported

that production of cumin in Syria was less than normal

in 2010. This resulted in a supply shortage in the

international market and India with better production

numbers took advantage of that situation during July-

August. However, exports declined sharply after that

due to reduced demand from gulf countries ahead of Ramadan month. The export target set by Spices Board

India for 2010-11 is around 40,000 tons, valued at `42,000 lakh.

Seasonality index: Jeera

As per jeera price seasonality index, prices show an

increasing trend from January due to the end of crop

season in other producing countries and lower stock

availability at spot market. However, from February

prices starts correcting as fresh crop arrivals start

hitting the market. July onwards Jeera prices start

moving higher due to off season for arrivals and

prices reach their peak in early September. After

that prices start falling as export demand decline on

account of Ramadan festival. From October onwards

sowing for next season crop starts thus based on the

sowing progress prices move in lower range and the

corrections in prices continue till January.

Outlook

According to market sources, production is expected to fall this year due to anticipated lower acreage and

lower yield levels following unfavorable weather conditions. Initially traders were expecting jeera acreage to be

increased this year due to favourable monsoon. However, due to delayed withdrawal of monsoon, soil moisture

level increased to above normal levels and farmers started shifting to wheat crop. Thus, jeera prices have already

started rising on the back of strong domestic demand due to decreasing acreage in major growing region of Gujarat

and Rajasthan. There is a need of around 1.15-2 lakh bags each month to meet domestic demand. A correction in

prices with intermittent gains is expected in February-March 2011 due to fresh crop arrivals in the market. Going

by the current trend of sowing and climatic condition, we may expect drop in production to 1.50 lakh tons due to

acreage shift and crop damage which might further support the uptrend in prices in the long run.

Figure 15: Jeera export trend

Source: Spices board & KCTL Research

Figure 16 Jeera prices seasonality


80

85

90

95

100

105

110

115


AGRI COMMODITIES

52

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

Feb-10 Mar-10 Apr-10 May-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Sep-10 Oct-10 Nov-10 Dec-10

Lower carry over Stocks

Sowing season started for nest crop ( higher productionforecast)

GoodDomestic and Export Demand

crop damage due toheavy rains

Corrections on all time high levels

Lower Carry over stock available at spot market

Technical analysis

Recommendation: Buy at 12500-13000 TP 19000 then 20000 SL 10800

Jeera NCDEX future prices traded extremely sideways in 2010 year. Overall, it moved within the range (15915-

10710). For the past couple of months prices are seen moving in a consolidation phase. As per the �ibonacci

principle immediate support is seen at 13832 (23.6% retracement of the range 16599-4877). Sustain above

is possible to resume its uptrend. Market is witnessing a strong support near 12300 levels (trend line), which

would be a crucial level to watch for 2011. On the higher side stiff resistance is at 15600 levels. A signi�icant

break above the same leads the prices to gain further and the upside potential is seen till 19000 then 20000

levels. Overall, we expect jeera prices to remain higher and recommend buying.

Turmeric

Figure 17: Turmeric Price Movement at NCDEX Platform- 2010



AGRI COMMODITIES

53

Turmeric futures prices were on a Bull Run since beginning of the year 2010 on strong buying interest supported

by lower carry-over stocks. The prices hit all-time high level of `14,358 in April. During 2010, new crop arrivals

failed to pick up even in the peak season (February-March) as farmers held back their produce anticipating

further rise in prices, which resulted into a rally in the prices. However, market was in consolidation phase

between April and June due to lean season for the produce.

According to trade sources, the production fell 19% Y/Y in 2009-10 to 3,50,000 tons. In the year 2010, turmeric

futures rose 122% to `16,350 per quintal from `7,347 per quintal on strong demand for the produce and lower

production. Prices took a smart correction between July and August on expectation of rise in acreage under

turmeric cultivation in 2010-11 season on favourable monsoon. Farmers were attracted by an unprecedented

rally in price and planted more area with turmeric. Prices were under pressure in third quarter of the year on

expectation of bumper crop on rise in acreage and favourable weather condition. However, crop loss concerns

were emerged in November due to unseasonal rains in Andhra Pradesh. Crop loss reports led the prices to

witness a rally once again. Due to smaller crop size in 2009-10, carry-forward stocks estimated lower. Export of

turmeric in 2010 fell 3.3% Y/Y to 50,750 tons due to lower crop size.

Turmeric Demand –Supply Scenario 2011

Turmeric production in 2011 is expected to be

higher by around 39% Y/Y to 4.88 lakh tons due

to higher acreage. Attractive returns during last

year provoked the farmers to put more area under

turmeric sowing. However, exports are declining

continuously in last 3 years. Projections for 2011

are looking balanced with huge carry over stocks.

Seasonality index: Turmeric

As per seasonality index, turmeric prices start its

upward trend since beginning of the year on active

buyers’ participation. However, prices will remain

in lower range compared to their yearly high levels.

Prices will take a good correction during March and

April following commencement of fresh arrivals to the

major spot markets. Prices start moving higher once

again from July onwards following emergence of fresh

export demand and ease in arrival pressure. However,

prices will see a sharp decline between October and

November as production estimates start circulating in

the market.

Outlook

The turmeric prices are expected to remain on a positive note during Q1CY2011 due to supply constraints and

strong domestic and export demand until the new harvesting begins. Once the fresh produce starts moving to

the market, we may see some pressure on prices. Moreover, the output in 2011 is expected to be higher than

2010 following greater acreage. According to trade sources, the overall production for 2011 is expected to be

higher by 39% Y/Y to 4,88,000 tons. However, due to unseasonal rains during November crop has been damage

to a certain extent. Although production is higher by 39%, supply crunch due to lower carry over stocks will

Table 12: Turmeric balance sheet - India (in tons)

2008-09 2009-10 2010-11* (Projections)

Beginning stock 100250 41750 21000

Production 294000 350000 488000

Domestic Consumption 300000 320000 400000

Exports 52500 50750 50000

Ending stocks 41750 21000 59000

Source: Trade sources & Spices board

85

90

95

100

105

110

115


Figure 18: Turmeric prices seasonality


AGRI COMMODITIES

54

keep the prices on bullish note. For FY10-11, the Spices Board has targeted turmeric exports of 50,000 tons.

However, prices may take corrections during starting of sowing season in July-August after that price movement

will mostly depend on the demand and the prevailing crop conditions at that time. Nonetheless, overall good

domestic demand is likely to keep the prices on positive side.

Technical analysis: Turmeric

Recommendation: Buy at 8400-8800 TP 11700 then 14200 with stop loss below 6800

Turmeric future prices witnessed uptrend in the year 2010 by extending the previous trend. Overall, it gained as

much as 209% from previous year close. According to Ichimoku analysis market is in bullish mode and is likely

to continue the same trend for 2011 and having a strong support near 11650 levels.

Chikou span is trading above the prices

Tenkan and Kijun line are supporting the trend as the Tenkan is hovering above the Kijun line

Cloud is also suggesting bullish trend as the market is hovering above the same (Senkou span 1 and Senkou

span 2)

The key support levels are at 11650 then 9008 levels (S1 and S2).

Overall, analysis suggests market is likely to see a correction before resuming its uptrend.

Chilli

The Chilli futures on Indian exchanges witnessed a declining trend during �irst 2-month of CY2010 on

commencement of fresh harvesting season in India. However, from March onwards prices gradually started

rising on good export demand. The chilli production in India for 2009-10 was projected higher on higher acreage.

According to Spices Board data, chilli exports in FY 2009-10 were 2,04,000 tonnes against 1,88,000 exported

in 2008-09. Though exports were higher from previous year, prices were under pressure because of huge stock

and higher production forecast. The estimated production for year 2009-10 stood around 13.2 Lakh tons.

The chilli futures prices were in a consolidation during April to July in absence of fresh triggers in the market.

Prices started showing a downtrend since last week of July on reports of favourable monsoon for chilli sowing

and prices touched year’s lower levels of `3833 at the end of August. However, during September prices shot up

and started moving higher because of late withdrawal of monsoon and unseasonal rains that badly aff ected the

crop in �ields. Good exports during this period ahead of festive season demand further added to the upside.

AGRI COMMODITIES

55


Figure 19: Chilli Price Movement at NCDEX Platform- 2010

3500

4000

4500

5000

5500

6000

1-Jan-10 1-Feb-10 3-Mar-10 3-Apr-10 4-May-10 2-Jun-10 2-Jul-10 31-Jul-10 31-Aug-10 30-Sep-10 30-Oct-10

Fresh Crop arrival (production up by 2% Y/Y)

Higher stocks available at market

Sowing for next season started in Guntur

Crop Loss due to unseasonal rains

Lower production forecaste and Lower Carry over stocks

Indian scenario

India is the largest producer and contributes 25% to

total world production. It is also largest consumer

and exporter of Chilli. Chilli is the most common spice

cultivated in the country. India has produced about

13.2 million tons of Chilli during 2009-10 up by 2%

Y/Y. After India, China is the major producer of Chilli

in the world. During 2010, Chinese chilli production

declined sharply because of unfavorable weather

condition which became an advantage for Indian

chilli exporters. This year chilli exports from India

reached record high levels. As per trade sources, chilli

production for year 2010-11 is expected to decline

by 25% to around 9.95 lakh tons as 40-60% crop

has been damaged due to unseasonal rains in major

growing regions. Production in 2011 is likely to be the

lowest production in last 4-5 years.

Seasonality index: Chilli

The seasonality index is prepared by considering data

for the last 10 years. The �igure indicates prices will

remain in downward trend starting from January

prices till May due to peak arrival season. However,

from June onwards prices starts moving upward on

Figure 20: Chilli production trend in India (Lakh tons)

Source: Spices board & KCTL Research

Figure 21: Chilli price seasonality

Sources: Spices board & KCTL Research

80

85

90

95

100

105

110

115


800

900

1000

1100

1200

1300

1400

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11*

AGRI COMMODITIES

56

good export demand and arrivals season also come to an end by this time. After June prices took small corrections

when sowing for next crop starts but over good demand ahead of festive season keep the prices up.

Demand –Supply scenario 2011

Chilli production in last few years is hovering in

the range of 12-13.25 lakh tons while in 2011

production is expected to decline sharply due

to huge damage to standing crop. As per trade

sources, this year production is expected to

be around 9.95 lakh tons down by 25% Y/Y. As

per projections for 2011 chilli balance sheet is

showing a shortage of 0.46 lakh tons which is

likely to support prices in long term.

Outlook: Chilli prices are likely to create new high in coming year on tight supply situation. Heavy rains during

November damaged the crop to a large extent. According to trade estimate, available stocks are around 70,000

tons while monthly average consumption is around 30,000 tons. Therefore, available stock may not be suf�icient

to meet the demand till fresh crop hit the market. As per market sources, production this year is expected to be

lower by 25% to around 9.95 Lakh tons. This will be the lowest production in last 4 -5 years.

Technical analysis: Chilli

Recommendation: Buy at 6700-7000 TP 10000 SL 5000

Chilli future prices continued its uptrend in the year 2010 by gaining as much as 95.3% from previous year

close. Market has breached the resistance near 6800 levels (previous swing highs) and closing above the same

suggests further upside movements could be seen. Initially we may see a lower correction before resuming its

uptrend. Those who are holding any long positions need to keep stop loss below 6800 as it is considered as a

major support levels. Formation of “Ascending triangle” pattern in monthly chart suggests bullish trend is still

intact. The upside potential is seen till 10800-11000 levels. Overall, analysis suggests chilli prices to remain

higher and recommend buying at dips.

AGRI COMMODITIES

Table 13: Chilli balance sheet - India (in Lakh tons)

2008-09 2009-10 2010-2011* (Projections)

Beginning stock 2.61 3.68 3.34

Production 12.95 13.2 9.95

Import 0 0 0

Domestic Consumption 10 11.5 11.75

Exports 1088 2.04 2

Ending stocks 3.68 3.34 -0.46

Source: Trade sources & Spices Board of India

57

The year 2010 has been a remarkable year in the history of the pulses sector in India. The stable production

rate (0.91%) despite the increasing consumption rate (6.51%) led to the spurt in the prices. All major pulses

prices were trading at higher levels during the beginning of the year. In order to curtail the price rise of major

pulses the government interventions were also signi�icant in the 2010. The price rise was mainly due to supply

side bottlenecks. In order to increase the production and productivity, central government announced a special

package in budget for FY11. It earmarked ̀ 300 crore to develop 60000 Pulses and Oilseeds Village. Starting from

extending the export ban on the pulses to 2011 a series of the government interventions came to the rescue of

the common man from the burden of the rising prices of the pulses. The increase in the minimum support prices

of the kharif pulses up to 30% was the major action taken to increase the area under pulses. These policies

yielded the expected result as the good monsoon that occurred supported the higher sowing and higher yield

estimates. The area under kharif pulses was up by 20.36% Y/Y to 113.88 lakh hectares while rabi acreage has

increased by 6% Y/Y to 141.58 lakh hectares. According to �irst advanced estimates total pulse production in

2010-11 is expected to be around 16.5 million tons. The sowing prospects and production estimates exerted

pressure on the prices of major pulses from August onwards. As the arrival season approached the intensity of

the pressure was higher which made pulses aff ordable for the common man towards the end of the year.

Pulses- Showers soak the pulses prices

Table 14: Minimum support prices (MSP) for the pulses- 2010-11

Crop 2007-2008

2008-2009

2009-2010

2010-2011

% Change over

2009-10

Arhar (Tur) 1590 2000 2300 3000 30.43

Moong 1740 2520 2760 3170 14.86

Urad 1740 2520 2520 2900 15.08

Chana 1445 1600 1760 2100 19.00

Lentil (Masur) 1545 1700 1870 2250 20.00

Figure 22: Pulses spot price movement-2010


1900

2400

2900

3400

3900

4400

4900

5400

5900

6400

6900

7400

7900


Urad Tur Moong Chana

Indian pulse market is price sensitive and the consumption of pulses is based on the traditional preference. In

case of prevailing higher prices most of the pulses can be substituted amongst themselves. Higher prices of tur

might shift the usage pattern to �lat beans dal in south India while it might result in usage of masur in north

India. The pulse consumption dynamics and the unstable production make it dif�icult to analyze the demand for

each pulse on yearly basis. Though no statistical correlation exists between the prices of two pulses but some

sentimental eff ect can be seen on the prices. The blending of the �lour of yellow peas (15-20%) with besan is

also a major consumption pattern which has come into light during the current year. The usage of the blends in

diff erent foods instead of using particular gram �lour reduces the cost economics of the industry.

Chana

Review: The year to date gains in chana futures was around 3.35% in the year 2010. According data available

from the Ministry of Agriculture, the area under chana in Rabi 2009 was 8.76 million hectares against 8.56

million hectares and the production was 73.5 lakh tons compared to 70 lakh tons in 2008. The increased

acreage and production exerted pressure on the prices at the beginning of the year. Ease in arrival pressure

from April and Rajasthan government revised stock limits from 100 tons to 300 tons gave cushion to the chana

prices. However, prices fell drastically after release of IMD monsoon forecast report, which was bearish for the

AGRI COMMODITIES

Source: MOA, GOI

58

Figure 23: Futures price movement- 2010

2000

2100

2200

2300

2400

2500

2600

01/01/2010 06/02/2010 15/03/2010 21/04/2010 27/05/2010 02/07/2010 06/08/2010 13/09/2010 19/10/2010 24/11/2010

lower stocks, lean season

Revised stock limits in Rajasthan from 100 tons to 300 tons

Good kharifsowing prospects

Increasingexports of kabuli chana

Conducive soil moisture for sowing

Lower imports-crop damage in canada and australia

Arrivals in south india


market. IMD has projected a good monsoon for 2010. But, fall was limited as pick up in physical demand and

export demand for Kabuli chana supported the prices to recover. There was a good demand for Kabuli chana

from Arabian countries that resulted into spurt in the prices. The rains during the late withdrawal of monsoon

created good soil moisture conditions which increased the hopes of higher acreage and good production.

The prices were under pressure on these cues till September. Starting from October, prices showed a strong

rally with mild correction in early late November on strong demand for the produce. Though the sowing was

progressing well, prices were on uptrend due to robust demand, lower stock and on report of decline in import

from Australia. Heavy rainfall in Australia has resulted into crop damage to a larger extent.

Outlook: Chana market may show a bearish trend in �irst half of the year on commencement of new harvesting

season in India. In the 2010-11, chana production is expected to increase to 7.6 million tons compared to 7.3

million tons last year. Chana acreage in 2011 is 90.83 lakh hectares as on 7th January against 83.32 lakh hectares

last year.

The drastic increase in the area under chana in

Rajasthan by 76% may lead to bumper harvest this

year. Along with these the arrivals of the new chana

crop from south India is likely to start from February

onwards. The arrivals from the major growing regions

like M.P, Rajasthan and Maharashtra are likely to hit

the markets in March and continue till April. All these

factors are likely to keep the market down till the

month of April. Looking into the current trend, central

government is likely to continue the stock limits,

decision about the export ban and zero import duty.

Table 15: Chana- Supply-Demand (In million tons)- 2010-11

Supply

Beginning stocks 3.00

Production 7.60

Imports 0.10

Total supply 10.70

Demand

Consumption 7.20

Exports 0.10

Ending stocks 3.40

Total demand 10.70

AGRI COMMODITIES

Source: Traders

59

In the global perspective, April- June will be the sowing period for the chana across Canada and Australia

which are the major exporters to India. The sowing prospects in these two nations shall also have some minimal

sentimental pressure on the market during this period.

The demand for the festive season is likely to prop up in the spot markets from June which would support

the uptrend in the prices till the month of August. During June-July the dal millers and retailers generally buy

for the festival season which starts from August and extends till October. The processing of the gram to dall and

besan generally require 30-40 days time.

The imports from Turkey shall also be low during the June-August as the production growth rate of chana

is negative (-2.8%) and globally this is the lean season for chana. So the chances of any imports of chana during

this period from global stocks are also lower as the global chana crop in the year 2010 was lower with exception

to India. All these factors are expected to support the uptrend of the prices in the June-August season.

Later on prices shall be in�luenced by the monsoon rains that would have occurred from June to September

period. As chana is a hardy crop normal monsoon and the soil moisture levels will also support higher sowing

prospects. The government policy of the pulses villages shall increase the land utilization under pulses across

India in turn resulting in higher acreage that exerts pressure on the prices. Towards the closing of the year the

likely imports from Australia and Canada impacts the market.

Overall the fundamentals are supporting a bearish trend in the �irst half of the year (Jan-May) and the bullish

trend for the second half of the year (June-December)


Recommendation: Chana NCDEX—Buy at 2400-2460 TP 2800 then 3000 SL 1900

Recent wave: As per the analysis, market has completed its corrective wave primary 2 and is currently in fresh

trend considered as cycle 3, which can bring rally in prices with unfolded minor waves. Market is witnessing

a horizontal trend line support at 1985 (previous swing lows of Primary wave 4, Primary wave A and Primary

wave C) sustain above is likely to con�irm the motive wave Cycle 3 is in progress. We expect prices to move

higher and recommend buying.

Outlook: We from KCTL expect chana prices to move higher for short to medium term and recommend buying.

AGRI COMMODITIES

60

Guar

Review: Guar seed and guar gum futures prices declined from January 2010 as the arrival pressure was exerted

from the Bikaner and Jodhpur regions where the crop arrives late than the irrigated regions like Haryana,

Sriganganagar and Hanumangarh. The prices traded �irm till June due to normal demand and suf�icient arrivals

across the spot markets. The spike in prices during this Jan- July period was due to good demand for guar

gum from the crude oil extracting companies. Delayed sowing activity caused by late onset and slow progress

of monsoon in key producing areas supported the market. However, with the entry and revival of monsoon,

the sowing activities geared up from mid July onwards. Improvement in sowing activity and anticipation of

more acreage in major producing regions resulted into heavy sell-off in the futures market in August month.

According to IMD, the Northwest region of India—a key guar producing region—received 12% above normal

rainfall in the monsoon season. Better-than-normal rainfall attracted farmers to increase area under guar seed

cultivation. As a result, guar seed area in Rajasthan—largest producing state in India—rose 10% Y/Y to 2.84

lakh hectares. Same trend was also seen in other states, but, of�icial data for the same is not available. Starting

from September, prices started moving higher on emergence of fresh buying discounting the factor of bumper

crop this year. Late withdrawal of the monsoon caused crop damage in few places, which added further strength

to the market. Around 10% of crop damage was reported because of incessant rains in late September and early

October which created concerns about the quality also. There were diff erent production estimates ranging from

70-120 lakh bags, however, production could be around 90 lakh to 1 crore bags, more than double compared to

last year. The special margin was imposed on buying side twice in a short span of 20 days. Higher margin guar

product had a negative impact on the market. However, its eff ect on spot market was less due to strong demand

from exporters and guar gum manufacturers.

The production of guar seed in the last three years has

been inconsistent due to deviations in the rainfall while in

2010 the production is higher than the normal around 90

lakh to 1 crore bags. Above normal monsoon in the north

western region of Rajasthan supported the production

trend in the current year. Though the quality was aff ected

to an extent during withdrawal of the monsoon, the gum

1700

1900

2100

2300

2500

2700

2900

4000

4300

4600

4900

5200

5500

5800

6100

6400

6700

01/01/2010 08/02/2010 16/03/2010 23/04/2010 01/06/2010 07/07/2010 12/08/2010 18/09/2010 27/10/2010 02/12/2010

guar gum guar seed

Delay in onset of monsoon in

rajasthan areas

Higher sowingand higher production

expectations

The fresh arrivals from desert regions like bikaner and

jodhpur regions

Strong global demandfor the guar gum

supported the price rise despite arrival season

Good demand from the crude oil extracting companies

Figure 24: Futures price movement- 2010


AGRI COMMODITIES

Table 16: Supply demand scenario in guar (lakh bag)

Guar Seed Guar Split

2009-10 2010-11 2009-10 2010-11

Carry Forward 30.0 13.8 9.0 4.14

Production 25.0 90.0 7.5 27.0

Total Supply 55.0 103.8 16.5 31.14

Source: Traders

61

recovery shall not be aff ected. The recovering global economies are resulting in strong global demand for the guar

gum. The expectations of the increase in the crude oil inventory shall result in higher demand for the guar gum.

Outlook: The fundamentals of guar remain strong to support the up trend of the guar prices in the long term.

The area under guar seed has increased by 10% in 2010 to 2,843 thousand hectares across Rajasthan. The

production during 2010 more than doubled to 90 lakh bags compared to 35 lakh bags and the consumption is

estimated around 1 crore bags. The carry forward stocks are likely to remain around 35 lakh bags for the crop

year 2011-2012. These carry forward stocks are lower against the expected increase in the exports (33%).

The projected increase in the crude oil inventory and the seasonality of the increase in rig counts of crude

oil during the March-May period shall have positive impact on the guar seed prices. The export consignments

for meeting these requirements of the crude oil extracting nations should be registered in the spot markets 30-

45 days before the requirement. The duration of the milling and guar gum production is around 25-30 days.

Considering this lag period the export demand arrives into the spot market during the arrival season (Nov-

Dec-2010) and prevails in the market till March (2011) supporting the uptrend in the prices. Apart from this the

good demand for churi and korma in the summer season shall extend support to the prices.

The �lood in Pakistan caused during the south west monsoon in the year 2010 has left an opportunity

for the Indian exporters to encash upon. Thus the exports of guar seed, gum and guar meal are estimated to

increase by 33% and the exports in the current �iscal is expected to cross 3 lakh bags against 2.18 lakh bags in

the last year which will extend support to the prices till March.

The consignments are signed till June-July by the guar processors who are actively buying across the major

spot markets. The stockists are also aggressively buying the guar gum across the spot markets as the crop and

crushing in the current year is above the normal production. The anticipation of higher global demand is prompting

the buying. The arrival pressure also decreases towards the end of January helping the prices to gain.

Over all the improving global economy, increasing uses of the guar gum is likely to extend strong support to

the guar seed and gum prices at the futures platform.


Recommendation: Guar seed NCDEX—Buy at 2300-2325 TP 2740 then 3040 SL 1900

Guar gum NCDEX—Buy at 6300-6500 TP 8000 then 8600 SL 5500

As per the Elliot wave analysis,

market has witnessed a complex

correction i.e. Reverse symmetrical

triangle (duration was almost 10

months). Recently market ended

minor wave “e” of �ive wave sequence

corrective intermediate wave (4) at

1928 levels. As of now market is in

fresh trend i.e. intermediate wave

(5), which is expected to bring rally

in prices for short to medium term

till 3000 -3200 levels. Normally 5th

wave takes place with �ive wave

sequences among these 1, 4 are corrective and rest others 1, 3, 5 are motive in nature. As per the trend line study

market has the potential to see a correction till 2410 levels thereafter we may see an upside rally.

Outlook: We expect prices to see a correction with support levels at 2410 and 2350 levels. Sustain above the

same may help the prices to resume its uptrend. We recommend buying near support levels.

AGRI COMMODITIES

62

Gainers and losers: International market

Commodity 10-12-2010 31-12-2009 % Change 52 WeekHigh

% Change from 52 Week High

52 WeekLow

% Change from 52 Week Low

Nymex Natural Gas 4.42 5.57 -20.73% 6.11 -27.69% 3.21 37.52%

LME Zinc 3 Month 2274.00 2560.00 -11.17% 2736.00 -16.89% 1577.00 44.20%

LME Lead 3 Month 2390.00 2432.00 -1.73% 2690.00 -11.15% 1535.00 55.70%

LIFFE Sugar 722.50 710.20 1.73% 812.90 -11.12% 421.20 71.53%

LME Aluminium 3 Month 2308.00 2230.00 3.50% 2500.00 -7.68% 1828.00 26.26%

CBOT Soy Meal 339.10 313.90 8.03% 364.90 -7.07% 249.20 36.08%

ICE Sugar 29.13 26.95 8.09% 33.39 -12.76% 13.00 124.08%

Nymex Crude Oil 87.79 79.36 10.62% 90.76 -3.27% 64.24 36.66%

LME Copper 3 Month 8990.00 7375.00 21.90% 9248.00 -2.79% 6037.50 48.90%

CBOT Soybean 1273.00 1039.75 22.43% 1337.75 -4.84% 900.00 41.44%

Comex Gold 1384.30 1096.20 26.28% 1431.10 -3.27% 1045.20 32.44%

LME Nickel 3 Month 23980.00 18525.00 29.45% 27595.00 -13.10% 16450.00 45.78%

CBOT Soy Oil 53.79 40.35 33.31% 55.13 -2.43% 35.75 50.46%

CBOT Corn 560.25 414.50 35.16% 605.00 -7.40% 324.50 72.65%

CBOT Wheat 735.50 541.50 35.83% 841.00 -12.54% 425.50 72.86%

ICE Coff ee 209.35 135.95 53.99% 218.70 -4.28% 126.55 65.43%

Comex Silver 28.58 16.82 69.87% 30.69 -6.89% 14.65 95.06%

ICE Cotton 136.97 75.60 81.18% 157.23 -12.89% 66.55 105.82%

Gainers and losers: Indian market

Commodity 10-12-2010 31-12-2009 % Change 52 Week High

% Change from 52 Week High

52 Week Low

% Change from 52 Week Low

MCX Natural Gas 201.50 259.50 -22.35% 281.60 -28.44% 144.70 39.25%

MCX Zinc 102.75 120.00 -14.38% 123.20 -16.60% 74.35 38.20%

NCDEX Guarseed 2450.00 2792.00 -12.25% 2808.00 -12.75% 1928.00 27.07%

NCDEX RM Seed 563.50 606.90 -7.15% 618.00 -8.82% 463.75 21.51%

NCDEX Soybean 2229.00 2383.50 -6.48% 2438.00 -8.57% 1878.00 18.69%

NCDEX Steel 24970.00 26670.00 -6.37% 29650.00 -15.78% 22710.00 9.95%

NCDEX Jeera 13746.00 14646.00 -6.15% 15915.00 -13.63% 10710.00 28.35%

NCDEX Chilli 5136.00 5439.00 -5.57% 5920.00 -13.24% 3833.00 33.99%

NCDEX Wheat 1276.40 1343.20 -4.97% 1460.00 -12.58% 1112.20 14.76%

MCX Lead 108.05 111.65 -3.22% 121.95 -11.40% 72.55 48.93%

NCDEX Chana 2457.00 2474.00 -0.69% 2583.00 -4.88% 2065.00 18.98%

MCX Aluminum 104.00 103.05 0.92% 110.40 -5.80% 85.90 21.07%

NCDEX Guar Gum 6205.00 5868.00 5.74% 6550.00 -5.27% 4348.00 42.71%

MCX Crude Oil 3958.00 3727.00 6.20% 4097.00 -3.39% 3127.00 26.57%

MCX Cardamom 1239.80 1112.70 11.42% 2097.00 -40.88% 868.00 42.83%

MCX Copper 411.30 344.00 19.56% 428.95 -4.11% 284.10 44.77%

NCDEX Soy Oil 586.95 487.85 20.31% 599.75 -2.13% 437.50 34.16%

MCX Gold 20503.00 16686.00 22.88% 20924.00 -2.01% 15950.00 28.55%

MCX Nickel 1084.20 863.10 25.62% 1224.70 -11.47% 795.50 36.29%

NCDEX Pepper 21531.00 14249.00 51.11% 22888.00 -5.93% 12447.00 72.98%

MCX Silver 43471.00 26771.00 62.38% 45735.00 -4.95% 23610.00 84.12%

NCDEX Turmeric 14676.00 7395.00 98.46% 16350.00 -10.24% 7347.00 99.76%

GAINERS AND LOSERS

Source: Bloomberg

Documents

Comtrade Yearly report - Karvy Commodities · 2011-02-07 · The objective of this comprehensive report is to enrich your understanding of commodities market and facilitate investing