Daily trading volume may double to Rs 30,000 cr

OUTLOOK 2006

Commodity traders would not forget 2005 easily, as the year is leaving with them the delightful memories of skyrocketing prices and huge returns on investments. The next year promises to see another good run.

Almost all national and international commodities hit their historical highs during the year.

While prices of crude and copper futures touched their lifetime highs, platinum and gold scaled the highest levels in over a quarter century. Again, while silver surged to its 18-year peak, zinc rose to a l6-year high, aluminium touched its 10-year high and tin climbed its highest level in eight years.

Sugar prices witnessed their highest in a decade, while orange juice and coffee futures scaled their new peaks this year.

However, at times the reasons for the price rise in some of these commodities were not pleasant; rather they were tragic.

For instance, hurricanes Katrina, Rita and Wilma were the biggest drivers for the energy futures shooting up during the year. These hurricanes also wreaked havoc on sugar crops in Florida and Louisiana, and devastated orange crops in Florida, thus hitting the US economy hard.

The year was especially memorable for commodities exchanges as they got permission from the regulator "" the Forward Market Commission (FMC) "" to start futures for about 50-odd new commodities on their platform.

Upbeat with great returns and a bright outlook, investors started pumping in money in commodities future. The result: single-day trade volume swelled six-fold to Rs 12,000 crore in December from Rs 2,000 crore in January.

With the FMC having recommended to the government to allow banks, foreign institutional investors (FIIs) and mutual funds (MFs) to participate in commodities futures, the exchanges project the daily trade volume to go up to Rs 25,000-30,000 crore this year i.e. 2006. Option trading is all set to play a dynamic role in commodities futures trade in 2006, traders said.

However, according to a group of market observers, commodities traders are not yet aware of the intricacies of this trade.

"Theoretical knowledge alone isn't enough, especially in a trade that largely depends on aspects such as seeds, crops, rainfall, harvesting, transportation, storage and spoilage. Even if the government permits the entry of banks, FIIs and MFs into physical trading, it (trading to pick up) would be difficult - at least in 2006, said Rajendra Daga, a member of the Multi Commodity Exchange of India. However, FIIs can enter through arbitrage, he added.

Of some possible developments, the FMC is most likely to take strict action against illiquid commodities, seen over the last three years.

This year, the regulator may ban futures trading in these commodities. An internal group of the forward trading watchdog is deliberating on compulsory delivery, which, if implemented, will go a long way in stopping unscrupulous trading.

"This would be a great step for small traders," a trader said. The FMC also made traders' registration compulsory from January 1, 2006 "" another step perceived to help small traders.

While crude is expected to stabilise at around $70 a barrel in 2006, gold is likely to build a base above $500 an ounce, and enter 2006 aiming at a minimum target of $575 an ounce with a major correction in the short term. The yellow metal is expected to give at least 15-20 per cent returns in the next one year, Sunil Ramrakhiani, head research, IL&FS, said.

The metals market is expected to continue the strong rally witnessed in 2005, as the global economy, in the words of a trader, is to remain a "metal-devouring monster".