risk analysis

INTRODUCTION: Introduction of MMTC Ltd.: INDIA'SLARGEST TRADING GIANT Established in 1963, MMTC, one of the two highest foreign exchange earner for India, is a leading international trading company with a turnover of over US$ 7 billion. It is the largest international trading company of India and the first Public Sector Enterprise to be accorded the status of "FIVE STAR EXPORT HOUSE" by Govt Of India for long standing contribution to exports. MMTC is the largest non-oil importer in India. MMTC's diverse trade activities encompass Third Country Trade, Joint Ventures, Link Deals - all modern day tools of international trading. Its vast international trade network, which includes a wholly owned international subsidiary in Singapore, spans almost in all countries in Asia, Europe, Africa, Oceania and Americas, giving MMTC a global market coverage.

INDIA'S LEADING EXPORTER OF MINERALS

MMTC is major global player in the minerals trade and is the single largest exporter of minerals from India. With its comprehensive infrastructural expertise to handle minerals, the company provides full logistic support from procurement, quality control to guaranteed timely deliveries of minerals from different ports,

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through a wide network of regional and port offices in India, as well as international subsidiary. MMTC has won the top export award from Chemicals and Allied Products Export Promotion Council (CAPEXIL) as the largest exporter of minerals from India for the eighteenth year in a row. ONE OF THE WORLD'S LARGEST BUYER OF FERTILIZERS As a leading player in fertilizers and fertilizer raw material, MMTC has become a major fertilizer marketing company in India, through planned forward integration of its import activities with the direct marketing of Urea, DAP, MOP, Sulphur, Rock Phosphate, SSP and other farming and agricultural inputs. THE

SINGLE

LARGEST

BULLION

TRADER

IN

THE

INDIAN

SUBCONTINENT MMTC is the largest importer of gold and silver in the Indian sub continent, handling about 146 MT of gold and 1250 MT of silver during 2008-09. MMTC supplies gold on loan and outright basis basis to the exporter, bullion dealers and jewellery manufacturers on all India basis. MMTC has retail jewellery & its own branded Sterling Silverware (Sanchi) showrooms in all the major metro cities of India.

MMTC also supplies branded hallmarked gold and studded

jewellery. Assay and hallmarking units have been set up at New Delhi, Ahmedabad & Kolkata for testing the purity of gold and gold articles duly accredited with Bureau of Indian Standards . Besides organizing major jewellery exhibitions in India & abroad, MMTC also has a medallion manufacturing unit for minting of Gold/SIlver medallions. MMTC has its online retail website www.mmtcretail.com. Page | 2

THE

BIGGEST

IMPORTER

OF

NON

FERROUS

METALS

&

INDUSTRIAL RAW MATERIAL TO INDIA

MMTC is India's largest seller of imported nonferrous metals viz. copper, aluminium, zinc, lead, tin and nickel. It also sells imported minor metals like magnesium, antimony, silicon and mercury, as also industrial raw materials like asbestos and also steel and its products. MMTC imports quality products conforming to international specifications like ASTM or BSS or LME approved brands. Major institutional customers of MMTC in India are accredited with ISO-9002 status. MMTC sources its metals from empanelled suppliers including producers and traders throughout the world. MMTC is a proud winner of gold trophy for exports of Engineering and Metallurgial product in non-SSI Sector and also awarded the All India Trophy for highest export in the category of prime metal by EEPC. GROWING INTEREST IN AGRO PRODUCTS WORLDWIDE MMTC is amongst the leading Indian exporters and importers of agro products. The company's bulk exports include commodities such as rice, wheat, wheat flour, soyameal, pulses, sugar, processed foods and plantation products like tea, coffee, jute etc.

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MMTC also undertakes extensive operations in oilseed extraction, from the procurement of seeds to the production of de-oiled cakes for export, as well as the production of edible oil for domestic consumption. It also imports edible oils. MMTC has won the gold trophy from FIEO for highest exports in agritulcture & plantation product in non-SSI Sector. GENERAL TRADING MMTC also handles items like textiles, Mulberry raw silk, building materials, marine products, chemicals, drugs and pharmaceuticals, processed foods, hydro carbons, coal and coke. Information on above can be supplied on request. MMTC also exports engineering products. AN INTEGRATED GLOBAL TRADER WITH BULK HANDLING CAPABILITIES Its comprehensive infrastructure for bulk cargo handling, with well developed arrangements for rail and road transportation, warehousing, port and shipping, operations, gives MMTC complete control over trade logistics, both for exports and imports. The company's countrywide domestic network is spread over 75 regional, subregional, port and field offices, warehouses and procurement centres.

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BROADBASED ACTIVITIES BEYOND TRADING MMTC's progress in the recent past has taken it from monopoly status to a competitive open market player making a strong thrust towards broad basing its sphere of activities, while consolidating its core areas of business. To create synergy between its manufacturing, trading and technology partners and to bring optimum efficiency and expertise to its operations worldwide, MMTC has promoted along with government of Orissa, a million tonnes capacity Iron & Steel plant and a 0.8 million tonne capacity Coke Oven battery with by product recovery plant and a captive power plant of 55 MW capacity. NETWORK OF OFFICES Its vast international trade network, includes. One wholly owned international subsidiary in Singapore- MMTC Transnational Pte. Ltd. (MTPL) 13 Regional offices East Zone :

Kolkata, Bhubaneshwar

West Zone :

Mumbai, Goa, Ahmedabad

North Zone :

Delhi, Jhandewalan (Delhi), Jaipur

South Zone :

Bangalore, Bellary, Chennai, Hyderabad, Vizag

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1.1 FINANCIAL ANALYSIS Highlights of Company Performance:

Highlights of Company Performance Rs In Million 2008-2009

2007-2008

Exports

45759

39114

Imports

306951

204499

Domestic

15497

20621

Other trade earnings Net Sales/ Trading Earnings

1967

796

370174

265030

Trading Profit

3209

4298

Profit before Taxes

2174

3246

Profit after Taxes

1402

2005

Dividend (i) Interim Dividend on Equity Shares

200

175

(ii) Proposed Dividend

200

275

(iii) Dividend Tax

68

67

Reserves and Surplus

10734

9800

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Business Wise Composition 2008-2009

4%

13%

Export

Import Domestic

83%

Product Group Wise Composition

9%

6%

10% Mineral

11%

Precious Metal Agro Fertilizer 59%

Hydrocarbon Metals

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Foreign Exchange Earnings and Outgo Earnings

outgo

Rs.in Million

Rs In Million

Exports

45788.4

Imports

306271.95

Others

159.66

Interest

1007.16

Others

2132.58

Totals

309411.69

Totals

45948.06

Market Price Data of MMTC Ltd. Month

Low (Rs.)

High (Rs.)

Apr-08

19,900.00

31,000.00

May-08

24,501.00

30,250.00

Jun-08

19,314.00

25,200.00

Jul-08

17,522.90

27,301.00

Aug-08

23,505.00

26,390.00

Sep-08

18,300.00

24,700.00

Oct-08

11,916.00

20,340.00

Nov-08

9,750.00

14,700.00

Dec-08

9,125.00

23,500.00

Jan-09

13,755.00

21,096.75

Feb-09

13,750.00

15,990.00

Mar-09

12,900.00

15,855.00 Page | 8

Latest Quarterly/Half yearly 31-Mar-2010(3) 31-Mar-2009(3) % Change

As On(Months) Sales of Products/Services

172300.50

48741.70

253.50

Other Income

419.00

282.20

48.48

Total Income

172719.50

49023.90

252.32

Total Expenses

171713.40

48049.60

257.37

OPBDIT

1006.10

974.30

3.26

Interest

-592.50

-356.10

66.39

31.10

29.10

6.87

-78.50

-12.40

533.06

0.00

0.00

--

Provision for Tax

499.50

190.00

162.89

After Tax Profit

989.50

399.70

147.56

Equity Capital

500.00

500.00

0.00

0.00

0.00

--

Depreciation Exceptional & Extraordinary Items Prior Period Adjustments

Reserves

Notes To Accounts : Mar 2010 1. The financial results are based on the accounts drawn in accordance with generally accepted accounting practices consistently followed in compliance with the mandatory Accounting Standards and are reported in the format prescribed by SEBI.

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2. Total Staff/ Administrative/Selling/other expenses/Write off amounted to Rs 63.88 crores during the period which includes Rs 47.03 crores on staff cost and Rs 16.61 crores towards administrative overheads and Rs 0.24 crores on Debts / Claims

written

off.

3. Provision for deferred tax on the income for the period, if any, which is adjustable against unrecognized deferred tax assets as at March 31, 2010 shall be accounted for on reassessment of unrecognized assets in the audited accounts.

4. The financial results have been reviewed by audit committee & approved by the Board of Directors at the meeting held on April 23, 2010 & limited review of the same has been carried-out by Statutory Auditors of the company.

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Income Statement 31-Mar09(12) Profit / Loss A/C

Rs mn

31-Mar08(12) %OI

Rs mn

31-Mar07(12) %OI

Rs mn

%OI

Net Sales (OI)

370174.37 100.00 265030.31 100.00 233461.36 100.00

Material Cost

359970.30 97.24 256828.30 96.91

Increase Decrease Inventories

1340.77

0.57

0.00

0.00

0.00

1652.80

0.45

1183.84

0.45

883.13

0.38

Manufacturing Expenses

6759.57

1.83

4316.19

1.63

779.13

0.33

Gross Profit

1791.70

0.48

2701.98

1.02

5557.12

2.38

Administration Selling and Distribution Expenses

1188.89

0.32

580.26

0.22

4502.06

1.93

EBITDA

602.81

0.16

2121.72

0.80

1055.06

0.45

Depreciation Depletion and Amortisation

125.83

0.03

126.84

0.05

79.69

0.03

EBIT

476.98

0.13

1994.88

0.75

975.37

0.42

Interest Expense

6658.69

1.80

1350.32

0.51

710.86

0.30

Other Income

8354.48

2.26

2624.67

0.99

1664.55

0.71

2172.77

0.59

3269.23

1.23

1929.06

0.83

771.61

0.21

1241.16

0.47

625.29

0.27

1.01

0.00

Net Profit

1402.17

0.38

2004.85

0.76

1267.96

0.54

Adjusted Net Profit

1402.17

0.38

2004.85

0.76

1267.96

0.54

0.00

0.00

0.00

0.00

0.00

0.00

400.00

0.11

450.00

0.17

250.00

0.11

Personnel Expenses

Pretax Income Provision for Tax Extra Ordinary and Prior Period Items Net

Dividend - Preference Dividend - Equity

0.00 224901.21 96.33

-23.22 -0.01

-35.81 -0.02

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Balance Sheet 31-Mar31-Mar31-Mar%BT %BT %BT 09 08 07 Equity Capital Preference Capital Share Capital

500.00 0.00

0.47 0.00

500.00 0.00

0.55 0.00

500.00 0.00

1.35 0.00

500.00

0.47

500.00

0.55

500.00

1.35

Reserves and Surplus

10733.83 10.11

Loan Funds Current Liabilities

43052.01 40.56 31983.53 35.35 11298.01 30.56 48350.23 45.55 45304.13 50.07 15306.29 41.40

Provisions Current Liabilities and Provisions Total Liabilities and Stockholders Equity (BT) Tangible Assets Net

3520.46

3.32

9799.64 10.83

2886.29

3.19

8321.28 22.51

1546.80

4.18

51870.69 48.86 48190.42 53.26 16853.09 45.58 106156.53 100.00 90473.59 100.00 36972.38 100.00 1296.76

1.22

1398.42

1.55

1492.02

4.04

0.00

0.00

0.00

0.00

0.00

0.00

Net Block Capital Work In Progress Net Fixed Assets

1296.76

1.22

1398.42

1.55

1492.02

4.04

21.18

0.02

13.87

0.02

34.21

0.09

1317.94

1.24

1412.29

1.56

1526.23

4.13

Investments

2315.43

2.18

2549.71

2.82

2549.56

6.90

Inventories

5785.29

5.45

5532.08

6.11

1776.94

4.81

Intangible Assets Net

Accounts Receivable Cash and Cash Equivalents Other Current Assets Current Assets

19296.39 18.18 14907.18 16.48 12693.69 34.33

Loans & Advances

18500.00 17.43

Miscellaneous Expenditure Other Assets Total Assets (BT)

58579.99 55.18 59520.36 65.79 14407.86 38.97 0.00 0.00 0.00 0.00 0.00 0.00 83661.67 78.81 79959.62 88.38 28878.49 78.11

58.26

0.05

6272.76

6.93

3642.04

9.85

22.51

0.02

15.07

0.04

106156.53 100.00 90473.59 100.00 36972.39 100.00

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1.2 RATIO ANALYSIS As on

31-Mar-09 31-Mar-08 31-Mar-07

Return Related Return on Total Assets (%) Return on Networth (%) Return on Capital Employed (%)

0.90 12.50 15.50

4.70 19.70 9.70

4.80 14.80 11.10

Profitability Gross Margin (%) Operating Margin (%) Net Profit Margin (%) Adjusted Net Profit Margin (%) Asset Turnover(x)

0.50 0.10 0.40 0.40 7.70

2.30 0.80 0.80 0.80 8.50

2.40 0.40 0.50 0.60 13.90

Leverage Debt/Equity ratio (x) Total Debt/Total Assets (x) Long term Debt/Networth (x) Interest Coverage (x)

3.80 0.80 -0.10

3.10 0.80 -1.60

1.30 0.60 -1.50

Liquidity Current Ratio (x) Quick Ratio (x) Cash Ratio (x)

1.60 1.60 1.20

1.70 1.60 1.30

1.70 1.80 0.90

Working Capital Working Capital to Sales (x) Working Capital Days (days gross sales) Receivables (days gross sales) Creditors (days cost of sales) FG Inventory (days cost of sales) RM Inventory (days consumption)

0.10 34.80 18.80 22.50 5.70 5.90

0.10 47.80 19.90 33.60 7.40 81.00

0.10 21.20 17.50 19.50 2.80 8.20

Cash Flow Indicator Operating Cash Flow/Sales (%)

-3.50

9.10

-2.10

Per Share Page | 13

Book Value Per Share (Rs) Earnings Per Share (Rs) Dividend Per Share (Rs) Growth(%) Total Operating Income Total Assets

223.50 28.00 8.00

205.50 40.10 9.00

176.10 25.40 5.00

39.67 28.39

13.52 110.33

42.41 50.10

Inferences from Ratio Analysis: A.

Return related Ratios: As we can see that the return on total assets is

decreasing sharply in 2009 to 0.90. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. This trend can indicate that the company is having rough time due to volatility of commodity market and increase in depreciation. Next ratio is return on Net worth which is also declined to the lowest as compared to the last two years. ROCE indicates the efficiency and profitability of a company's capital investments. This is increased to a good percentage. In 2009 to 15.50

B.

Profitability of the company can be inferred by this analysis. The GPR has

declined to 0.50 from 4.70 in year 2009 as compared to the last year which is a very sharp decline. Same effect can be seen in the NET PROFIT of the company. Asset turnover ratio is also the lowest in 2009 as compared to the last year.

C.

Leverage ratios indicate company's methods of financing or to measure its

ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. A high debt/equity ratio generally means that a company has been aggressive in financing Page | 14

its growth with debt. This can result in volatile earnings as a result of the additional interest expense as it can be seen in the ratio of company that it is increasing every year. Interest coverage ratio is used to determine how easily a company can pay interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. We can see that the company‟s interest coverage ratio is very low to 0.10 in 2009. It is due to the high interest paid in 2009 Rs. 6659 Million. as compared to last year which was Rs. 1350 Million.

D.

Liquidity Ratios are important indicator the ability to convert an asset to

cash quickly. With the above analysis we can infer that the company‟s liquidity is consistent. Company is balancing its current assets efficiently.

E.

Working Capital ratios indicate company's efficiency and its short-term

financial health. It has ratio to sales, days, receivables, creditors, finished goods inventory, raw material. All the year we can see that the ratios are consistent which encourages investor‟s to invest in shares of the company.

F.

Operating Cash Flow/Sales (%): This ratio, which is expressed as a

percentage, compares a company's operating cash flow to its net sales or revenues, which gives investors an idea of the company's ability to turn sales into cash. It would be worrisome to see a company's sales grow without a parallel growth in operating cash flow. Positive and negative changes in a company's terms of sale and/or the collection experience of its accounts receivable will show up in this Page | 15

indicator. We can see the worrisome figures in all three years with lot of fluctuations.

G.

Earnings Per Share (Rs) & Dividend Per Share (Rs): serves as an

indicator of a company's profitability. As we can infer from the above analysis that the company‟s book value per share is increasing but the EPS has decreased than the last year. Dividends are constant as compared to the last year.

H.

Growth: Total Operating income of company is increased as compared to

the last year in 2009 and Total Assets value is decreased than the last year to the lowest in three years at 28.39.

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1.3 OVERVIEW OF RISK MANAGEMENT UNDERSTANDING CONCEPT OF RISK: Risk means the uncertainty associated with any activity or event or investment. Risk can be known or unknown also can be controllable or non controllable. Risk is the possibility of variance in result than that of expected. Total Risk comprises of systematic and unsystematic risk. Systematic risk means risk occurs due to the factors which are external to the organization & generally are uncontrollable e.g. Market Risk. Unsystematic risk means risk which occurs due to the internal factors of the organization & generally is controllable e.g. financial risk. Risk is exposure to uncertainty. Thus, risk has two components: Uncertainty and Exposure to that uncertainty. For example, if a man jumps out of an airplane with a parachute on his back, he may be uncertain as to Whether or not the chute will open. He is taking a risk because he is exposed to that uncertainty. If the chute fails to open, he will suffer personally. In this example, a typical spectator on the ground would not be taking risk. They may be equally uncertain as to whether the chute will open, but they have no personal exposure to that uncertainty. Exceptions might include: A spectator to whom the man jumping from the plane owes money A spectator who is a member of the man‟s family Such spectators do face risk because they may suffer financially and/or emotionally should the man‟s chute fail to open they are exposed to the uncertainty. The financial services industry is primarily concerned with Financial risk which is financial exposure to uncertainty

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1.2.1 Classification of risk There are six major types of risk. 1. Market risk 2. Operational risk 3. Credit risk 4. Capital Risk 5. Financial Risk 6.Political Risk 1. Market risk Today we are passing through a phase where it is not very difficult to define market risk. Anybody will agree that the world is passing through harsh crises and at this point of time any decision right from an investment decision to an expansion decision of an enterprises will impeding risk. Academically this general risk is nothing but „market risk‟. Market risk is not very new concept; rather it has been stayed with the market itself in one form or other. Market risk is the risk which is common to an entire class of assets and liabilities. Market risk can-not be wished away by diversification it is also called „non-diversified risk‟ Market risk is the potential for loss due to change in market factors such as interest rates, exchange rates liquidity. Types of market risk A) Currency risk B) Interest rate risk C) Liquidity risk d) Foreign Exchange Risk

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A) Currency risk Currency risk is potential of loss caused by change in market exchange rate currencies. The corporate has seen a remarkable 69% increase in forex turnover from April 2004 reaching $3.2 . India is no exception and has also witnessed tremendous increase in its forex turnover. The massive increase in forex turnover has made both the banks and there customers vulnerable. B) Interest rate risk Interest rate risk is the exposure of the bank‟s financial condition to adverse movement in interest risk. Banks typically borrow for short term and led for long term and this process attract reprising risk as interest rate might increase over the period where assets would have been financed at fixed interest rate. Interest rate risk arises primarily with respect to short terms borrowings under import and export financing. The Company monitors market interest rates closely to ensure that favorable interest rates are secured. At balance sheet date, the Company has minimal exposure to interest rate risk. In Case of MMTC Limited it recovers interest rate risk through Forward Cover agreement. C) Liquidity risk The Company manages liquidity risk by maintaining cash and marketable securities, and available funding through an adequate amount of committed credit facilities sufficient to enable it to meet its operational requirements. The Company major classes of financial liabilities are trade and other payables and borrowings and their contractual maturities are less than one year. Corporate faces liquidity risk due to mismatch in assets and liabilities. Liquidity risk also arises when banks do not loan able funds. In common parlance the risk that arises from the difficulty of selling an asset is called as liquidity risk. When investment banks such as Bear Stearns and Lehman started looking vulnerable, Page | 19

their clients started to withdraw capital and unwind positions leading to run on these investment banks.

d) Foreign currency exchange rate risk The Company's business operations are not exposed to significant foreign currency risks, as it has no significant transactions denominated in foreign currencies. Foreign Exchange dealing is a business that one get involved in, primarily to obtain protection against adverse rate movements on their core international business. Foreign Exchange dealing is essentially a risk-reward business where profit potential is substantial but it is extremely risky too. Foreign exchange Dealings has the certain peculiarities that make it a very risky business. These would include: 1) FX deals are across country borders and therefore, often foreign currency prices are Subject to controls and restrictions imposed by foreign authorities. Needless to say, these controls and restrictions are invariably dictated by their own domestic factors and economy. 2) FX deals involve two currencies and therefore, rates are influenced by domestic as well as international factors. 3) The FX market is a 24-hour global market and overseas developments can affect Rates significantly. 4) The FX market has great depth and numerous players shifting vast sums of money.FX rates therefore, can move considerably, especially when speculation against a currency rises. 5) FX markets are characterized by advanced technology, communications and speed. Decision-making has to be instantaneous.

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Factors Affecting Exchange Rates In a free market, it is the demand and supply of the currency which should determine the exchange rates but demand and supply is the dependent on many factors, which are ultimately the cause of the exchange rate fluctuation, sometimes wild. The volatility of exchange rates can not be traced to the singe reason and consequently, it becomes difficult to precisely define the factors that affect exchange rates. How ever, the more important among them are as follows:  Balance of payments  Strength of economy  Fiscal policy  Interest rates  monetary policy  Political factor  Exchange control  Central bank intervention  Speculation  Technical factors  Expectations of the foreign exchange market

2. Operational risk: An Operational risk is a risk arising from execution of a company‟s business functions e.g. legal or fraud risk. Operational risk is a risk of loss resulting from inadequate or failed internal processes, people and systems, etc. SGS is authorized rating agency for assessing the quality of Material.

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3. Credit Risk The possibility that bond issuer will default, by failing to repay principal and interest in a timely manner. Bonds issued by the federal government, for the most part, are immune from default (if the government needs money it can just print more). Bonds issued by corporations are more likely to be defaulted on, since companies often go bankrupt. Municipalities occasionally default as well, although it is much less common. It is also called as default risk. Bank deposits that are neither past due nor impaired are mainly deposits with banks with high creditratings as determined by international credit rating agencies. The Company has no significant concentration of credit risk. The Company has policies in place to ensure that sales of goods are made to customers with adequate financial standing and an appropriate credit history. At balance sheet date, there is no class of financial assets that is past due or impaired. This is the worst case credit event that can take place. An intermediate credit risk occurs when the counterparty's creditworthiness is downgraded by the credit agencies causing the value of obligations it has issued to decline in value. One can see immediately that market risk and credit risk interact in that the contracts into which we enter with counterparties will fluctuate in value with changes in market prices, thus affecting the size of our credit exposure. Note also that we are only exposed to credit risk on contracts in which we are owed some form of payment. If we owe the counterparty payment and the counterparty defaults, we are not at risk of losing any future cash flows. Different aspects of credit risk: market risk, default rates and recovery rates The two aspects of credit risk are the market risk of the contracts into which we have entered with counterparties and the potential for some pejorative credit event Page | 22

such as default or downgrade .We know from previous articles on "Risk Measurement" that there are ways to quantify market risk, including most notably Value-at-Risk techniques. The difficult thing is to try and calculate the probability of default or of a negative credit event. There are different methodologies to try and calculate default risk using the credit spreads observed in the corporate bond market, historical default rates for a given class of credit, interpreting information available from financial statements and

other public

commentary from the counterparty's management Credit analysis is done from Bank statement, financial statement etc of counterparty .Dun & Bradstreet & CRISIL is authorized international credit rating agency & for assessing the counterparty or client of MMTC Ltd..The company minimizing the risk through Forward cover , Letter of Credit, & Bank of Guarantee.

Letter of Credit, & Bank of Guarantee.

A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure that a transaction proceeds as planned, while bank guarantees Reduce the loss if the transaction does not go as planned A letter of credit is an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. This ensures the Payment will be made as long as the services are performed

A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially Page | 23

insure a buyer or seller from loss or damage due to nonperformance By the other party in a contract For example a letter of credit could be used in the delivery of goods or the completion of a service. The seller may request that the buyer obtain a letter of credit before the transaction occurs. The buyer would purchase this letter of credit from a bank and forward it to the seller's bank. This letter would substitute the bank's credit for that of its client, ensuring correct and timely payment.

A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash flow difficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the opposing party in the transaction .These financial instruments are often used in trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they don't have established business relationships. The instruments are designed to reduce the risk taken by each party.

4. Capital risk The Company's objectives when managing capital are to ensure that the Company is adequately capitalized and to maintain an optimal capital structure by issuing or redeeming additional equity and debt instruments when necessary. The Company monitors capital on the basis of the total shareholder's equity as shown on the balance sheet. MMTC is not subject to any externally imposed capital requirements. Page | 24

5. Financial risk factors The Company's activities expose it to a variety of financial risk, including the effects of changes in foreign currencies exchange rates. The Company's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Company. Risk management is carried out under policies approved by the Board of Directors. The Board of Directors and the holding corporation provide guidelines for overall risk management, as well as policies covering these specific areas.

RISK VARIABLES MARKETING ASPECT 1 Decreasing in market demand to the type of COMMODITY in surrounding location. 2

Unsatisfied consumer for the products or services.

3

Difficulty for reaching the target market.

Political aspect 1

Non - conducive political climate for investment.

2

Leak of law enforcement.

3

Misuse of political power.

4

Regulation and policy aspect

5 6

Regulation in export-import limitation. Influences of increasing in taxes policy.

7

Influences of domestic product and resources use policy.

8

Policy in stopping subsidy. Page | 25

9

Policy in increasing of loan interest rate.

. Financial aspect 1

Payback Period longer than expected.

2

Break Even Point (BEP) longer than expected.

3

High of Debt / Equity Ratio

4

High of Debt / Equity Ratio

5

Fluctuation in foreign currency.

Economic aspect 1

National economic growth doesn't match the projection. Uncontrolled inflation.

2 3 Currency devaluation. 4

Increasement in regional minimum payment for workers.

Page | 26

1.3 Risk Areas and Events of MMTC.  Loans & Advances include Rs. 157.37 million (P.Y.Rs.157.37 million) being the amount deposited with the High Court in respect of a case which is still pending. Necessary liability towards principal amount already exists and the provision, if any, towards interest of Rs. 22.50 million (P.Y. Rs. 22.50 million) will be made after final decision of the Court.  9. Income tax of Rs. 2233.46 million (P.Y. Rs. 1717.61 million) under the head "Loans and Advances" consists of Rs.424.13 million (PY Rs. 420.36 million) paid to Income Tax Department against the disputed demands of Rs.457.06 million (P.Y. Rs. 450.36 millions) for various assessment years and advance tax/TDS/FBT of Rs. 1809.33 million (PY Rs. 1297.24 million) towards income tax/fringe benefit tax liability for financial years 2007-08 & 2008-09. Provision for additional demand, if any, will be made on completion of the Appellate Proceedings.  Valuation of closing stock at market price being lower than cost, has resulted in a loss of Rs.587.35 million (P.Y Rs.13.37 million) during the year.  During the year an amount of Rs 234.84 million towards difference in exchange has been shown under cost of sales which has arisen mainly due to adoption of notional exchange rate applicable on the date of bills of lading for initial recognition in reporting currency in respect of import purchases / export sales denominated in foreign currency.  Sale of canalized urea to Deptt. of Fertilisers(DOF), Government of India is made based on allocation letters issued by DOF and by transferring shipping documents. However, no separate agreement is signed with DOF.

Page | 27

 In respect of forward exchange contracts outstanding as on 31.3.09 relating to firm commitments and highly probable forecast transactions, the loss of Rs. Nil million (L.Y. loss of Rs. 36.11 million) has been recognized in the Profit & Loss Account on the basis of changes in exchange rate at the close of the year.  During the year 2 kg gold valued at Rs. 2.24 million was short received at Regional Office Bangalore while returning the unsold jewellery on account of exhibition against which provision for Rs 2.24 million has been made in the accounts. Departmental action has been initiated against the erring officials. Suit for recovery has been filed besides criminal complaint.  A claim for Rs 20.62 million (LY Rs 20.62 million) against an associate on account of damaged imported Polyester is pending for which a provision of Rs 15.54 million (LY Rs 15.54 million)has been made after taking into account the EMD and other payables amounting to Rs 5.08 million (LY Rs 5.08 million). The company has requested customs for abandonment which is pending for adjudication. Loans and Advances and Sundry Creditors include Rs. 7414.99 million (P.Y. Rs. 1274.65 million) being notional value of 4973 Kgs. (P.Y. 1058 Kgs) of gold belonging to foreign suppliers issued on loan basis to the Associates/ Customers of the Company.

Page | 28

INTERNATIONAL TRADE If you walk into a supermarket and are able to buy South American bananas, Brazilian coffee and a bottle of South African wine, you are experiencing the effects of international trade International trade allows us to expand our markets for both goods and services that otherwise may not have been available to us. It is the reason why you can pick between a Japanese, German and American car. As a result of international trade, the market contains greater competition and therefore more competitive prices, which bring a cheaper product home to the consumer

What Is International Trade? International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments. Increased Efficiency of Trading Globally Global trade allows wealthy countries to use their resources - whether labor, technology or capital - more efficiently. Because countries are endowed with Page | 29

different assets and natural resources (land, labor, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries. If a country cannot efficiently produce an item, it can obtain the item by trading with another country that can. This is known as specialization in international trade Let's take a simple example. Country A and Country B both produce cotton sweaters and wine. Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and three hours to produce six bottles of wine (total of four hours). But these two countries realize that they could produce more by focusing on those products with which they have a comparative advantage. Country A then begins to produce only wine and Country B produces only cotton sweaters. Each country can now create a specialized output of 20 units per year and trade equal proportions of both products. As such each country has now access to 20 units of Both Product We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing. More specifically, for each country, the opportunity cost of producing 16 units of both sweaters and wine is 20 units of both products (after trading). Specialization reduces their opportunity cost and therefore maximizes their efficiency in acquiring the goods they need. With the greater supply, the price of each product would decrease, thus giving an advantage to the end consumer as well. Note that, in the example above, Country B could produce both wine and cotton more efficiently than Country A (less time). This is called an absolute advantage, and Country B may have it because of a higher level of technology. However, according to international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization

Page | 30

Other Possible Benefits of Trading Globally International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets. In theory, economies can therefore grow more efficiently and can more easily Become competitive economic participant

For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company

expansion

and

growth,

which

means

higher

revenues.

Free Trade vs. Protectionism

As with other theories, there are opposing views. International trade has two contrasting views regarding the level of control placed on trade: free trade and protectionism. Free trade is the simpler of the two theories: a laissez-faire approach, with no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing needs to be done to protect or promote trade and growth because market forces will do so automatically. In contrast, protectionism holds that regulation of international trade is important to ensure that markets function properly. Advocates of this theory believe that market inefficiencies may hamper the benefits of international trade and they aim to guide the market accordingly. Protectionism exists in many different forms, but the most common are tariffs, subsidies and quotas. These strategies attempt to correct any inefficiency in the international market.

Page | 31

As it opens up the opportunity for specialization and therefore more efficient use of resources, international trade has potential to maximize a country's capacity to produce and acquire goods. Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change and, as it develops, so too must all of its participants.

Page | 32

3. Commodity Market & Trading India Commodity Market “We are moving from a world in which the big eat the small to one in which the fast eat the slow”. -Klaus Schwab, 2000 (Founder of the World Economic Forum) “A strong and vibrant cash market is a pre-condition for a successful and transparent futures market.”

INTRODUCTION The vast geographical extent of India and her huge population is aptly complemented by the size of her market. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency. India Co mmodity Market can be subdivided into the following two categories: • Wholesale Market • Retail Market The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons: Page | 33

 The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers.  The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole s ellers was not felt. In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country. Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand are owned by various business houses like Pa ntaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles both agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to 6 draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Page | 34

Demand for commodities is likely to become four times by 2010 than what it presently is. COMMODITY A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for marketsavvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an ef ficient portfolio diversification option. In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent.

Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on.

Page | 35

COMMODITY MARKET Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

What is a commodity exchange? A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

Page | 36

What is Commodity Futures? A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons:

Consumer Preferences: In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance. Changes in supply: They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging. The objectives of Commodity futures: Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in Page | 37

price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular unauthentic price discovery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. Price

stabilization along with balancing demand and supply

position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. Flexibility, certainty and transparenc y in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players. Benefits of Commodity Futures Markets: The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the

Page | 38

exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly.

1. Price Discovery:Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal.

2. Price Risk Management: Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities

like

farmers,

processors,

merchandisers,

manufacturers, exporters, importers etc. Page | 39

3. Import- Export competitiveness: The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions.

4. Predictable Pricing: The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of chang es in their input prices very easily. With no futures market, the manufacturer can be caught between severe short -term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves tha t could otherwise be utilized for making other profitable investments.

Page | 40

5. Benefits for farmers/Agriculturalists: Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions. 6. Credit accessibility: The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to payback the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This posses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible Page | 41

through futures markets, would cut down the discount rate in commodity lending. 7. Improved product quality: The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange certified warehouses have the potential to become the norm for physical trade.

Page | 42

4. Structure of Commodity Market:

Page | 43

5. Commodities Traded at NCDEX:•1.Kapas •A.V797Kapas •2.Hessian •3.IndianCotton •A.S06LSCottonAhmedabad •B.CottonKadi •C.Indian31mmcotton •D.indian28mmcotton •E.J34MSCottonBhatinda •F.CottonAbohar •4.SttapleFibreYarn •5.Sacking •A.Jute(Btwill-665Gms)-Kollata •6.Gram •A.Gram(Chana)-NewDelhi •7.cottonbales •8.cottonseeds •A.undecorticatedcottonseedoilcake •9.LongStapleCotton •10.MediumStappleCotton •A.NEWMEDIUMSTAPLECOTTON •11.Silk •A.MulberryRawSilk-Bangalore •B.MulberryGreenCocoons-Ramnagar •12.MulberryRawSilk •13.MulberryGreenCocoons •14.Coffee-Arabica •15.CottonLongKadi •16.CottonMedAbohar •17.CottonShortStaple •18.Sugar(S-30) •19.MuatardseedOilcake •20.PPTQ •21.Cement •22.Mediumcottonyarn •23.Polyvinchlorid

Page | 44

•1. Pepper Domestic-MG1 •2.Turmeric •A.Turmeric –Nizamabad •3.Pepper Domestic-500g/l •4.Black Pepper Int'l-MLS ASTA

•5.Black Pepper Int'l-VB ASTA •6.Black pepper Int'l FAQ •7.Pepper

•A.Pepper Dommestic-MG1. •B.Black Pepper Int'l VB ASTA. •C.Black Pepper Int'l-MLS ASTA. •D.Black Pepper Int'l FAQ. •E.Pepper Dommestic-500g/L. •F.Pepper –Kochi •8.Cardamom •9.Pepper 550 G/L •10.Red Chilly •A.Chilli (Paala) Guntur

•B.Chilli (Paala) LCA 334 •11.Jeera •12.Rubber RSS4

•13.Jeera Unjha •14.CUMINSEED •15.Arecanut Page | 45

•1.RBD Pamolein •A.RBD P'Olein -Kakinada •2.Groundnut Oil •A.Groundnut Expeller Oil

•3.Sunflower Oil •4.Rapeseed/Mustardseed •A.Rapeseed -42 •B.Rape/Mustard seed -Jaipur •5.Rapeseed/Mustardseed Oil •A.EXP R/M oil -Jaipur •B.Expeller mustard oil -Sri Ganganagar •6.Rapeseed/Mustardseed oil-Cake •7.Soy bean •A.Soy bean -Indore •8.Soy Meal •A.Soy Meal -Indore •B.Yellow Soybean Meal (Export) •9.Soy Oil •A.Ref Soya oil -Indore •10.Copra •11.CottonSeed •A.Cottonbales •12.Safflower •13.Groundnut •A.Groundnut(shell) •14.Castor oil-Int'l •15.Coconut oil •16.Copra cake •17.Groundnut oilCack Page | 46

•18.Cottonseed oil •19.Sesamum (Til or Jiljili) •A.Whitish Sesame Seed -Rajkot •20.Sesamum oil •21.Sesamum OilCake •22.Safflower OilCake •23.Rice Bran •24.Rice Bran Oil •25.Rice Bran OilCake •26.Safflower Oil

•27.Sanflower OilCake •28.Sunflower Seed •29.Crude Palm Oil •A.Crude Palm oil -Kandla

•30.Cottonseed -Oilcake •A.Cotton Seed Oilcake -Akola •31.Vanaspati •32.Soybean Oilcake •33.Linseed •34.Linseed Oil •35.Linseed Oilcake •36.Coconut Oilcake •37.Mustard Seed •38.Mustard Seed Jaipur •39.Sesame Seed ( Natural 99.1) •40.Castorseed-Disa •41.Mustardseed Oilcake •42.KAPASKHALI •43.Middle east crude oil •44.refined sunflower oil

Page | 47

•1.Aluminium Ingots •2.Nickel •3.Copper •A.Copper Cathode •4.Zinc •5.Lead •6.Tin •7.Gold

•A.Gold-M •B.Pure Gold -Mumbai •C.Kilo -Gold •D.Gold -HNI •E.SONA995MUM •F.Pure Gold -Mumbai -1 Kg •8.Silver •A.Silver-M •B.Pure Silver -New Delhi -30 Kg (Mega)

•C.Pure Silver -New Delhi •D.Silver -HNI •E.CHANDIDEL •9.Steel •A.Steel -Long

•B.Steel -Flat •C.Mild Steel Ingots -Ghaziabad •10.Steel Long Bhavnagar •11.Steel Long Govindgarh •12.sponge iron •13.GOLD AHMEDABAD •14.GOLD DELHI •15.GOLD KOLKATA •16.GOLD MUMBAI

•17.GOLD MINI DELHI •18.GOLD MINI KOLKATA •19.GOLD MINI MUMBAI •20.GOLD MINI AHMEDABAD Page | 48

•1.Gur •A.Gur-chaku -Muzaffarnagar •2.Coffee-Plantation A •3.Potato •4.Sugar •A.Sugar M Grade -Muzaffarnagar •B.Sugar S Grade -Vashi •C.Sugar S Grade

•D.Sugar Grade -M •E.Sugar Grade -S •5.Coffee-Robusta Cherry AB •6.Raw Coffee Arabica Parchment •7.Raw Coffee Robusta Cherry •8.Castorseed •A.Castorseed-5 •B.Castorseed -Disa •9.Castor-oil

•10.Coffee •A.Coffee-Plantation A. •B.Coffee-Robusta Cherry AB. •C.Raw Coffee Robusta Cherry. •D.Raw Coffee Arabica Parchment. •E.Arabica Coffee -Hassan •F.Robusta Coffee -Kushalnagar •G.Arabica Coffee -Hassan (New) •H.Robusta Coffee -Kushalnagar (New)

•11.Guarseed •A.Guarseed -Jodhpur •B.Guarseed -BND •12.CastorOil Cake •13.Rubber

•A.Rubber -Kottayam

Page | 49

•14.Rice •A.Basmati Rice •B.Grade A Parboiled Rice Delhi •C.Common Parboiled Rice Delhi •D.Indian Raw Rice Parmal •E.Indian Parboiled Rice IR-36/IR-64 •F.Grade A Raw Rice Delhi •G.Common Raw Rice Delhi

•15.Wheat •A.Wheat -New Delhi SMQ •B.Wheat Delhi (New) •16.Raw Jute •A.Raw Jute -Kolkata

•17.GuarGum •A.GuarGum -Jodhpur •18.Guarseed Bandhani •19.Maize •A.Yellow Red Maize -Nizamabad •20.Guar Gum Bandhani •21.CASHEW KERNEL W320 •A.Cashew W 320 -Kollam •22.Sugar S

•23.Sugar M •24.Sarbati Rice •25.Coffee-Arabica Plantation A •26.Cashews W-320-Kollam •27.Mentha Oil •28.Sugar (S30) •29.HIGH DENSITY POL •30.Gurchaku •31.cardamom

•32.ISABGULSEED •33.Isabgul

Page | 50

•1.Masoor •A.masoor grain bold •2.Urad •A.Urad -Mumbai •3.Tur / Arhar •A.Lemon Tur -Mumbai •B.Maharashtra Lal Tur -Akola •4.Moong •5.Yellow Peas •A.Yellow Peas -Mumbai •6.Chana

1.Crude Oil

2.Brent Crude Oil 3.Furnace Oil 4.Natural Gas 5. Potato Page | 51

6. International Commodity Trading Commodity trading is one of the preferred investment options. A huge number of investors put their money in these options for several reasons like less volatility of this market. At the same time the growth prospects of this market are also good. The commodity market investors put their money in both the national and international markets and the recent growth in the international markets have attracted more investors. Making investments in the international commodities markets is not a new concept. According to the available data, these investments were started in Osaka, Japan in the 18th century. The shipping merchants were the most prominent traders at that time. Later, international commodity trading was also started in the United States of America in the mid-nineteenth century. The commodities that were traded at that time were corns, cotton and a few other agriculturalproducts.

The trading activities in the international commodities market are regulated by a large number of agreements. The national policies of a number of countries regarding the commodity trading activities also play a major role in shaping the global commodities trading markets. The commodity exchanges play an important role in increasing the commodity trading activities among the investors. The international commodities exchanges are used widely by the investors to buy or sell the commodities to the interested people. There are a number of such exchanges and the United States of America has the maximum number of commodities followed by the United Kingdom. Only those commodities are selected for trading purpose that has huge demand in the local market. Some of these are the agricultural products, metals, petroleum etc. At the same time, there Page | 52

are certain international commodities exchanges that have been built for the purpose of trading some particular commodities like coffee, gold, petroleum etc.

The futures and options are a part of the international commodity trading activities and the international commodity exchanges are used for future or commodity trading. Both of these are kind of contracts with different features related to the commodity trading. The trading in the international commodity markets is done at a larger scale and the closing prices are made public at the end of the day. These prices are very important for the global markets. Some of the biggest International Minneapolis Grain Exchange Commodities

exchanges

followinLondon Financial

Futures

are

the

International and

Options

Exchange Chicago Board of Trade

New York Board of Trade

Sydney Futures Exchange Ltd.

New York Mercantile Exchange

Tokyo Commodity Exchange

South African Futures Exchange

Chicago

Mercantile

Exchange French Futures & Options Exchange

Chicago Board Options Exchange (2) Tokyo Grain Exchange

Bolsa de Mercadorias & Futuros

Kansas City Board of Trade

European Warrant Exchange

Hong Kong Futures Exchange

Tokyo International Financial Futures Exchange

Trading Page | 53

Many people have become very rich in the commodity markets. It is one of the few investment areas where an individual with limited capital can make extraordinary profits in a relatively short period of time. Many people lose money in commodity trading. The truth is that commodity trading is only as risky.

Those who treat trading as a get-rich-quick scheme are likely to lose because they have to take big risks. If you act prudently, treat your trading like a business instead of a giant gambling casino and are willing to settle for a reasonable return, the risks are acceptable. The probability of success excellent .

The process of trading commodities is also known as futures trading. Unlike other kinds of investments, such as stocks and bonds, when you trade futures, you do not actually buy anything or own anything. You are speculating on the future direction of the price in the commodity you are trading. This is like a bet on future price direction. The terms "buy" and "sell" merely indicate the direction you expect future prices will take

There are many inherent advantages of commodity futures as an investment vehicle over other investment alternatives such as savings accounts, stocks, bonds, options, real estate and collectibles.

The primary attraction, of course, is the potential for large profits in a short period of time. The reason that futures trading can be so profitable is leverage. While profits can be large in commodity trading, it is not easy to make consistently correct decisions about what and when to buy and sell. Commodity speculation offers an important advantage over such illiquid vehicles as real estate and Page | 54

collectibles. The balance in your account is always available If you maintain sufficient margin, you can even spend your current profit on a trade without closing out the position. With stocks, bonds and real estate, you can't spend your gains until you actually sell the investment.

Commodity speculation offers an important advantage over such illiquid vehicles as real estate and collectibles. The balance in your account is always available. If you maintain sufficient margin, you can even spend your current profit on a trade without closing out the position. With stocks, bonds and real estate, you can't spend your gains until you actually sell the investment.

Commodity trading is not particularly complicated. Unlike the stock market where there are over ten thousand potential stocks and mutual funds, there are only about forty viable futures markets to trade. Those markets cover the gamut of market sectors, however, you can diversify throughout all important segments of the world economy. There are even tax advantages to making your money from futures trading. Regardless of the actual holding period, commodity profits are automatically taxed as sixty percent long-term capital gains and forty percent short-term capital gains. The current maximum capital gains rate is thirty-three percent, somewhat less than the maximum rate for ordinary income. To the extent that capital gains tax rates are reduced in the future, commodity traders will benefit. If a distinction is reestablished so that taxes on long-term gains are lower than on short-term gains, commodity traders will benefit. The Risk of trading:

Page | 55

Before entering into Commodity trading , it is good to take a look at the risks in trading. Commodity trading has the reputation of being a highly risky endeavor. It is true that a high percentage of traders eventually lose money. Many people have lost substantial sums. Anyone who is going to try speculation should be fully aware of and be comfortable with the risks involved. Managing the risks of trading is a very important part of any trader's success. Although the risks can be managed, they can never be eliminated. Remember that the high returns successful speculators can earn, are available only because the speculator is being paid to take risk away from others. Some surprise situations that can cause unpredicted losses are freezes, floods, droughts, government currency interventions and crop reports. With attention and foresight a trader can sidestep these risky situations. The best way to control unpredictable risks are to trade conservatively so larger-than-expected losses are still only

a

small

percentage

of

the

total

account.

There is no point trading commodities if you cannot handle the psychological discomfort of making losing trades. While people tend to take losses personally as a sign of failure, good traders shrug them off. The best trading plans result in many losses. Because of the amount of randomness in market price action, such losses are inevitable. The Trading Process Some typical steps in the process of making a commodity trade including the trader's decision-making process and the procedures involved in actually placing the trade. In order to make decisions about when to trade commodity futures, you must have a source of price data. Many daily newspapers carry some commodity prices in their financial sections. The Wall Street Journal has comprehensive commodity price Page | 56

listings. Investor's Business Daily has both price tables and numerous price charts. All experienced commodity traders prefer to look at price activity on a chart rather than trying to interpret tables of numbers. In financial analysis, charts are indispensable for quickly grasping the essence of historical and recent priceaction. Looking at such bar charts enables a trader to see the recent trend of prices whether up, down or sideways in whatever time frame they choose. Following the current trend of prices are the cornerstone of successful trading. There are a number of ways to obtain the price charts a trader needs to analyze the markets. You can make your own using graph paper. This sounds rather primitive, but some experts recommend it as a good way to put yourself in close touch with price activity and monitor risk. Another source of chart is the printed chart service. There is space on the charts to update them daily during the following week until next chart book arrives. These printed chart books normally have a number of indicators plotted along with the price action and contain a wealth of additional information. For computer owners there are many software programs that create fancy charts on the computer screen. You can input the price data manually or, via telephone modem, download comprehensive data after the markets close for the day. Those with larger budgets can install a small satellite dish and watch price changes in all the markets nearly instantaneously as they occur. The software creates charts dynamically on the computer screen as each trade takes place on the exchanges. You can put many different charts on the screen and thus watch numerous markets all around the world in real time. Those who can't trade profitably without a computer probably won't be helped too much by using a computer. It may actually be detrimental by causing an increase in trading frequency. While a computer will not make a bad trader into good one, they are fun to use, and they do make a trader's easier. There are two primary analytic methods for deciding when to take a futures position: fundamental analysis and technical analysis. Fundamental analysis involves using Page | 57

economic data relating to supply and demand to forecast likely future price action. Technical analysis involves analyzing past price action of the market itself to forecast the likely future price action. While there are differences of opinion about the relative merits of the two approaches, almost all successful traders emphasize technical analysis. There are a number of reasons for this. First and foremost is the difficulty of obtaining accurate fundamental data. While various governments and private companies publish statistics concerning crop sizes and demand levels, these numbers are gross estimates at best. With the current global marketplace, even if you could obtain accurate current information, it would still be impossible to predict future supply and demand with enough accuracy to makedecission. . Technical analysts argue that since the most knowledgeable commercial participants are actively trading in the markets, the current price trend is the most accurate assessment of future supply and demand. If someone is correct that for fundamental reasons, prices will likely move up strongly in the future, the commercial participants who have the greatest knowledge and influence on the markets should certainly be moving the price upward right now. If price instead is moving down, a lot of very knowledgeable people must think price in the future will likely be down, notup. For this reason, almost all successful speculators learn to follow price action and not try futilely to predict turning points in advance. They seek to trade in tune with the large participants who move the markets.

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7. Risk Analysis Methodology Risk Control Methods in Commodity Futures Trading One of the important elements of commodity futures trading is to have the discipline to exit losing trades. Many novice traders have fallen into the trap of holding on to their positions for too long whilst in a trade, hopefully anticipating for a turn in market trend. However, this does not happen and they end up spiraling deeper and deeper into greater losses. At the end of it all, they have no choice but to exit the market with a huge portion of their capital wiped out. This would not have occurred if they had implemented risk control strategies typical of experienced commodity futures traders. Appropriate stop losses are calculated and put into place at the point when they enter a trade. Evidently, stop losses are part of a trading plan which includes profit targets, and stop loss adjustments. Once a stop loss is hit, traders exit their trades with minimal or acceptable losses, and subsequently move on to the next trade. This goes to show that an experienced trader is well aware of his risk tolerance levels when he enters a trade. He also understands that not all of his trades will turn out favorably, and that there is a probability for winning and losing each time. Subsequently, the next question now would be, how would a trader identify the right stop losses to place? According to Bruce Kovner, an experienced trader featured in the book Market Wizards, he would utilize technical analysis methods to pinpoint technical barriers which are great locations to place stops. However, he cautions against placing stops within a trading range in ranging markets, as this will result in being stopped out prematurely. Thus, he advocates placing stop losses beyond the trading range while trading in ranging markets. There may also be instances where a large number of commodity futures traders may have identified the same stop loss points. In these cases, it may be a good idea to identify stops at different locations by adopting different methods of analysis. However, in situations where these stops cannot be found, the trader would have no choice but to place stops at these obvious locations within the Page | 59

chart. Another aspect of commodity futures trading would be the maximum percentage of capital that a trader should risk in each trade. The general contention is that a trader should not risk more than 5% of his capital in each of his trades. In fact, 1% to 2% would be preferable risk levels for each trade. Any percentage higher than this will result in relatively huge losses should a trade go wrong. In these circumstances, a trader could get wiped out in no time if he is on a losing streak. Thus, with a lower risk level, a trader would still have adequate capital to make a comeback should his trades turn out to be losses. Finally, any commodity futures trader should analyze his past losses to determine the causes of failure. This way, he is able to learn from his mistakes and avoid making them again. At times, traders who have been suffering from a losing streak should take a break from trading in order regain their emotional stance before going into the market again. Risk Analysis Methodology I) Monte Carlo methods (or Monte Carlo experiments) are a class of computational algorithms that rely on repeated random sampling to compute their results. Monte Carlo methods are often used in simulating physical and mathematical systems. Because of their reliance on repeated computation of random or pseudo-random numbers, these methods are most suited to calculation by a computer and tend to be used when it is unfeasible or impossible to compute an exact result with a deterministic algorithm. Monte Carlo simulation methods are especially useful in studying systems with a large number of coupled degrees of freedom, such as fluids, disordered materials, strongly coupled solids, and cellular structures (see cellular Potts model). More broadly, Monte Carlo methods are useful for modeling phenomena with significant uncertainty in inputs, such as the calculation of risk in business. These methods are also widely used in mathematics: a classic use is for the evaluation of definite integrals, particularly multidimensional integrals with complicated boundary conditions. It is a widely successful method in risk analysis when compared with alternative methods or human intuition. When Monte Carlo simulations have been applied in space exploration and oil exploration, actual observations of failures, cost overruns and schedule overruns are routinely better predicted by the simulations than by human intuition or alternative "soft" methods Page | 60

II) Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one day period, assuming markets are normal and there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is termed a “VaR break.”

The 5% Value at Risk of a hypothetical profit-and-loss probability density function VaR has five main uses in finance: risk management, risk measurement, financial control, financial reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well.

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III) The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or simply the rate of return (ROR). In the context of savings and loans the IRR is also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest rate or inflation). Uses Because the internal rate of return is a rate quantity, it is an indicator of the efficiency, quality, or yield of an investment. This is in contrast with the net present value, which is an indicator of the value or magnitude of an investment. An investment is considered acceptable if its internal rate of return is greater than an established minimum acceptable rate of return or cost of capital. In a scenario where an investment is considered by a firm that has equity holders, this minimum rate is the cost of capital of the investment (which may be determined by the riskadjusted cost of capital of alternative investments). This ensures that the investment is supported by equity holders since, in general, an investment whose IRR exceeds its cost of capital adds value for the company (i.e., it is economically profitable). Calculation Given a collection of pairs (time, cash flow) involved in a project, the internal rate of return follows from the net present value as a function of the rate of return. A rate of return for which this function is zero is an internal rate of return. Given the (period, cash flow) pairs (n, Cn) where n is a positive integer, the total number of periods N, and the net present value NPV, the internal rate of return is given by r in:

Note that the period is usually given in years, but the calculation may be made simpler if r is calculated using the period in which the majority of the problem is defined (e.g., using months if most of the cash flows occur at monthly intervals) and converted to a yearly period thereafter. Note that any fixed time can be used in place of the present (e.g., the end of one interval of an annuity); the value obtained is zero if and only if the NPV is zero. Page | 62

In the case that the cash flows are random variables, such as in the case of a life annuity, the expected values are put into the above formula. Often, the value of r cannot be found analytically. In this case, numerical methods or graphical methods must be used. Example If an investment may be given by the sequence of cash flows Year (n) Cash Flow (Cn) Then the IRR r is given by 0

-4000

1

1200 .

2

1410

3

1875

4

1050

IV)

In this case, the answer is 14.3%.

Net Present Value (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.

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Formula Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms,

where t - the time of the cash flow i - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.) Rt - the net cash flow (the amount of cash, inflow minus outflow) at time t (for educational purposes, R0 is commonly placed to the left of the sum to emphasize its role as (minus) the investment. The result of this formula if multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay will be the present value but in case where the cash flows are not equal in amount then the previous formula will be used to determine the present value of each cash flow separately. Any cash flow within 12 months will not be discounted for NPV purpose. What NPV Means NPV is an indicator of how much value an investment or project adds to the firm. With a particular project, if Rt is a positive value, the project is in the status of discounted cash inflow in the time of t. If Rt is a negative value, the project is in the status of discounted cash outflow in the time of t. Appropriately risked projects Page | 64

with a positive NPV could be accepted. This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost, i.e. comparison with other available investments. In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher no-no should be selected.

If...

It means...

Then...

NPV > the investment would add value the project may be accepted 0 to the firm NPV < the investment would subtract the project should be rejected 0 value from the firm We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. NPV = the investment would neither Decision should be based on other 0 gain nor lose value for the firm criteria, e.g. strategic positioning or other factors not explicitly included in the calculation. Example A corporation must decide whether to introduce a new product line. The new product will have startup costs, operational costs, and incoming cash flows over six years. This project will have an immediate (t=0) cash outflow of $100,000 (which might include machinery, and employee training costs). Other cash outflows for years 1-6 are expected to be $5,000 per year. Cash inflows are expected to be $30,000 each for years 1-6. All cash flows are after-tax, and there are no cash flows expected after year 6. The required rate of return is 10%. The present value (PV) can be calculated for each year: Page | 65

Year

Cashflow

Present Value

T=0

-$100,000

T=1

$22,727

T=2

$20,661

T=3

$18,783

T=4

$17,075

T=5

$15,523

T=6

$14,112

The sum of all these present values is the net present value, which equals $8,881.52. Since the NPV is greater than zero, it would be better to invest in the project than to do nothing, and the corporation should invest in this project if there is no mutually exclusive alternative with a higher NPV.

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8. Market Trend and Risk Associated with each commodity We will now study the Market Trend and the risks associated with these few commodities which the company has to take in their Business Process. Commodity trading though is a very less risky Business but there are always some corners and edges to look for. The business involves huge investments reason being the less volatility of commodity markets and considered as the safest investment for businesses. Some risks involved in Commodity markets are  Exchange Risks  Finance Risk  Credit Risk  Changes in Government Regulations  Unfavorable Monsoon  Low Margins  High Quantity of Commodity involved  Price movements is purely based on Demand & Supply  Failure of Future Predictability  Securities Transaction Act is not Applicable to commodity Futures Trading Below are some commodities which MMTC Ltd. Deals I. II.

Gold Fertilizers

III.

Coal

IV.

Wheat

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Commodity Wise Risk Analysis 8.1 Analysis of GOLD Industry Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of gold‟s total accumulated holdings relate to “store of value” considerations. Holdings in this category include the central bank reserves, private investments, and high-cartage jewelry bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of gold‟s total accumulated holdings can be considered a commodity, the jewelry bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a “currency without a country‟. It is an internationally recognized asset that is not dependent upon any government‟s promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk.

What makes Gold different from other commodities?

The flow demand of commodities is driven primarily by exogenous variables that are subject to the business cycle, such as GDP or absorption. Consequently, one would expect that a sudden unanticipated increase in the demand for a given commodity that is not met by an immediate increase in supply should, all else being equal, drive the price of the commodity upwards. However, it is our contention that, in the case of gold, buffer stocks can be supplied with perfect

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elasticity. If this argument holds true, no such upward price pressure will be observed in the gold market in the presence of a positive demand shock. The existence of a sophisticated liquid market in gold has, over the past 15 years, provided a mechanism for gold held by central banks and other major institutions to come back to the market. Although the demand for gold as an industrial input or as a final product (jewellery) differs across regions, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. This is not to say that exogenous shifts in flow demand will have no influence at all on the price of gold, but rather that the large supply of inventory is likely to dampen any resultant spikes in price. The extent of this dampening effect depends on the gestation lag within which liquid inventories can be converted in industrial inputs. In the gold industry such time lags are typically very short. Gold has three crucial attributes that, combined, set it apart from other commodities: firstly, as said gold is homogeneous; secondly, gold is indestructible and fungible; and thirdly, the Inventory of aboveground stocks is astronomically large relative to changes in flow demand. One consequence of these attributes is a dramatic reduction in gestation lags, given low search costs and the well-developed leasing market. One would expect that the time required to convert bullion into producer inventory is short, relative to other commodities which may be less liquid and less homogenous than gold and may require longer time scales to extract and be converted into usable producer inventory, making them more vulnerable to cyclical price volatility. Of course, because of the variability of demand, the price responsiveness of each commodity will depend in part on precautionary inventory holding. The fundamental differences between gold and other financial assets and commodities give rise to the following “hard line” hypothesis: the impact of cyclical demand using as proxies GDP, inflation, nominal and real interest rates,

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and the term structure of interest rates on returns on gold, is negligible, in contrast to the impact of cyclical demand on other commodities and financial assets.

Global Scenario

Demand Demand for gold is widely spread around the world. East Asia, the Indian subcontinent and the Middle East accounted for 72% of world demand in 2007. 55% of demand is attributable to just five countries - India, Italy, Turkey, USA and China, each market driven by a different set of socio-economic and cultural factors. Rapid demographic and other socio-economic changes in many of the key consuming nations are also likely to produce new patterns of demand. This buying is likely to be centered in those countries where the investment element of the jewellery sector is strongest. The constraints surrounding mine output are unlikely to ease, and in fact, have the potential to worsen as credit conditions continue to cause problems for some miners and explorers. Furthermore, net selling by the central bank sector should remain at relatively low levels. However, as we saw in Q4, much will depend on the direction of the gold price and the scrap response. Continued high levels of the gold price could see scrap levels increase further.

Table: Identifiable Gold Demand (tones)

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Jewellery Gold jewellery demand declined during the fourth quarter as the global economic crisis began to bite and prices continued to fluctuate around relatively high levels. Total tonnage off-take, at 538.9 tones, was down 6% on Q4 2007, while the yearon-year decline was a more marked 11%. Meanwhile, the $US value measure of demand reveals that Q4 demand of $US13.8bn was 4% below year-earlier levels, with the result that 2008 annual demand – at $US59.7bn – was 11% higher than 2007 levels. The main factor affecting jewellery demand was the difficult economic environment that has taken hold in most countries. Consumers are facing issues such as rising unemployment and falling house prices and stock markets and are focusing their spending decisions on necessities. Once again however, it is worthy of comment that the value measure of jewellery demand confirms that spending on gold jewellery remains relatively robust. Although the severity of the economic climate took its toll in the fourth quarter, for calendar 2008 the primary value of gold jewellery demand increased by $US6.1bn. Movements in the price of gold were also a key factor in quashing demand. Although the gold price dipped sharply in October, it soon recovered lost ground and this higher price level, together with a rise in volatility, discouraged purchases in many of the more price sensitive markets. In contrast however, some markets, e.g. mainland China, Russia and the Middle East, benefited from elevated levels of investment-related demand for gold jewellery, as the intrinsic value of gold lent a stronger investment perspective to jewellery purchases. Industrial Electronics demand was profoundly affected by the global economic slowdown and subsequent lack of confidence across the supply chain, slipping 15%. Elsewhere, the other industrial and decorative sector recorded a modest 2% increase on the back of a significant rise in Indian off take, while gold Page | 72

used in dental applications continued its secular decline, falling 7%. Looking more closely at the electronics sector reveals an industry that, for the most part, is currently undergoing a crisis on the back of steadily deteriorating economic conditions. The decline of 15% relative to year-earlier levels took tonnage to its lowest level since Q4 2004. Waning consumer spending resulted in sharp declines in both production and exports from the world‟s largest producers. Demand from the other industrial and decorative segment was relatively stable Italy recorded a 6% rise relative to year-earlier levels as a result of increased GPC (gold potassium cyanide) production, much of which is used in the electro-forming of jewellery (a process geared to producing low weight jewellery items) and in the plating of accessories. Lastly, gold used in dental applications is estimated to have declined 7% relative to Q4 2007 as ongoing substitution to more affordable and cosmetically pleasing applications continued to limit the use of the precious metal. Investment Net retail investment drove the result, rising from 61.4 tons in Q4 2007 to 304.2 tons in Q4 2008 (an astonishing 243 tones or 396%) and accounting for 94% of the tonnage increase in identifiable investment. Net investment in Exchange Traded Funds (ETFs) and similar products also made a notable contribution to the increase in investor inflows, up 18% or 15 tones. All components of net retail investment recorded extremely strong growth. Bar hoarding, which largely covers the nonwestern markets, increased from 30.2 tonnes in Q4 2007 to 126.6 tonnes in Q4 2008, a rise of 318%? Official coins also enjoyed impressive growth, more than tripling from 22.4 tons to 67.9 tones. However, the highlight of the quarter was the 92.3 tone improvement in "other identified retail investment" to 92.6 tons from just 0.3tonnes. This category reflects the impact of “western” investor activity in the secondary retail investment market, predominantly Europe and North America i.e. Page | 73

it includes western demand for bars and secondary demand for official coins. These dramatic retail investment inflows reflect the extreme uncertainty that surrounds the global economy and financial system. In an environment where investors are more concerned about the loss of capital than they are about the return on capital, the absence of default risk or counterparty risk has been a key attraction for gold Combining identifiable investment (largely investors with a medium and long term focus) with inferred investment (largely investors with a more speculative focus) gives us total investment flows. In Q4 2008, total investment was up 22% on the levels of Q4 2007. For the year as a whole, total investment was up 44%, equivalent to a 69% rise in $US value terms from $14.7bn to $24.8bn. These investment flows help explain why the gold price rose 25% from an average of $US695/ oz in 2007 to $US872 in 2008. Notably, the annual increase in identifiable investment (which excludes speculative flows) exceeded that of total investment (which includes them). It is also clear that while those speculative flows were reasonably volatile on a quarter-to quarter basis, the main source of total investment flows during the quarter were, in fact, investors with a medium to longer term focus.

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Table : Identifiable Gold Demand ($USmn)

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Table : Investment demands (in tonnes except where specified)

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Table: Consumer demand in selected countries 2007 & 2008 (tonnes)

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Above table clearly shows that demand for gold in India is gradually decreasing because of very high price and also in India jewelry are made out of recycled or scrap gold. But we can find out that there is increasing in demand of gold from Greater china, China, Hong Kong and Vietnam. In Indonesia and USA there is tremendous increase for demand for net retail investment. Totally there is overall 3% increase in gold demand of gold but jewellery demand decreased 11% compare to 2007 and gold for net retail investment had reached 87% increase peoples are more interested keeping gold bars as asset. Indian Scenario

India is the world‟s largest consumer of gold in tonnage terms. In 2005, India accounted for 22% of global gold jewellery demand and 35% of all net retail investment (coins and bars). Gold demand has grown at an average annual rate of 10% since the repeal of the Gold Control Act in 1990, which had forbidden the holding of gold in bar form1. Although estimates vary, India is now thought to hold close to 15,000 tons or 10% of the world‟s entire above-ground gold stocks. Major Indian markets Traditionally most investment has taken the form of physical gold. In 2005, Indians bought 102 tons of gold coins and bars. But there are new ways to invest in gold. Since October 2003 the government has allowed futures trading and there are now three futures exchanges, the two largest being the Multi Commodity Exchange of India Ltd (MCX) and the National Commodity and Derivatives Exchange Ltd (NCDEX). The next major development is likely to be the arrival of Exchange Traded Funds (ETFs), expected before the end of 2006. UTI Asset Page | 78

Management Company Ltd and Benchmark Asset Management Ltd are currently seeking regulatory approval to sell gold ETF. These instruments give investors a relatively cost efficient and secure way to access the gold market. They are listed securities that are backed by allocated gold held in a vault on behalf of investors and are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of a security on a regulated stock exchange. Role of RBI in Gold The Reserve Bank is required to hold a fixed amount of gold under the Reserve Bank of India Act. The original RBI Act (1934) obliged the Reserve Bank to hold 40% of its assets in gold coin, gold bullion and foreign securities, with not less than Rs. 400 million in value held in gold. The system was later amended, under the Reserve Bank of India Amendment Act 1956, to the minimum reserve system, that required the bank to hold at least Rs.1150 million of its assets in gold (this did not imply the need to acquire additional gold, as the value of existing goldreserves were revised up at the time). Rs.1150 million equates to just $24.7 million at today‟s exchange rate and is tiny in comparison to India‟s total foreign exchange reserves of $151.6 billion. India mobilized its gold reserves during the 1991 balance of payments crisis. Between May and July, India shipped a total of 47 tones of the country‟s gold reserves (the RBI is allowed to hold up to 15% of its total gold reserves outside the country) to the Bank of England as collateral against a $400 million loan and leased a further 20 tons of confiscated gold (not included in the reserve figures) to Union Bank of Switzerland with a six-month buyback option to raise a $200 million loan. The funds were used to help India meet its short-term debt obligations and import bill. The RBI bought back all 67 tons of gold later that year. It also revalued its gold reserves from Rs. 28 billion to Rs. 72 Page | 79

billion, as it moved from using an outdated gold price4 to valuing its reserves at close to the international market price. The move vastly improved India‟s reported import coverage ratio. The RBI currently holds 557.7 tons of gold, which though small in comparison to total reserves (6.5% as at November 2009), is still the tenth highest of central banks in tonnage terms in the world.

8.2 Market Influencing Factors Affecting MMTC Ltd. ➢ Above ground supply from sales by central banks, reclaimed scrap and official gold loans: This is mainly concern with supplies other than mining due to continuous decrease in mine production and also increase in the cost of mining but no decrease in demand had tremendous demand for supply from this above ground reserve holdings this lead to more price of gold due to supply and demand mismatch. In India due to more price of gold now it‟s mainly jewelries are made out of the scrap gold. Official sales by central banks will result in priced fluctuation in market. (Refer to table 1 of Global scenario) ➢ Producer / miner hedging interest; It is mainly driven by producer were they are having chance to deposit there produced gold in their stock in anticipation of more price. Otherwise it will also happen like due to fewer prices at today market they will have future contracts with trade exchanges to supply gold at particular date at particular price so that they can hedge their risk. It is largely effect the market of prices of gold. ➢ World macro-economic factors - US Dollar, Interest rate It is directly related to change in the exchange rate of currency due to macro economic factors at world level. Gold is traded in terms of US$ for that if our

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Indian rupee will become weak against US$ than the gold prices will automatically move up in our country vice versa is also true. ➢ Comparative returns on stock markets If stock market is giving better results than more money will be invested in share market rather than in gold. Due recession stock market has collapsed it started from 2008 and still continuing from that day the more investor are interested toward investing in gold. People fear about investing in stock market had lead to more demand of gold that intern had pushed to the price of gold. ➢ Domestic demand based on monsoon and agricultural output: In our country economy is driven by monsoon and agricultural output if year has very good rainfall and output than there will be price stabilization in the market due to which farmer get good price for his produce and consumer also have good purchase price due to which people have more money to invest in the gold it will increase the demand for gold simultaneously prices also. We can find that during continuous three year drought from 2001 to2004 there decrease in the price of gold due to less demand from India. It is mainly depend upon income generating of the country.

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8.3 Analysis of Fertilizer Industry

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Methodology

Demand For Fertilizers The projections of fertilizer nutrients under different scenarios/assumptions show a range of demands figures of total nutrients between24 and 28.5 mil. Tons. By 2011-12, the terminal year of 11th Plan and between 26 and 34 mil. Tons. By 201516. If variables affecting fertilizer use grow at the rate of last 5 years, the total nutrient requirement will amount to about 34 mil tons. Which includes 20.4 mil. Tons. Of N, 8.9 mil. Tons. Of P and 4.7 mil. Tons. Of K by the end of 2015-16. The demand for urea is projected to be around 30.85 mil.tons. by 2011-12 and 36.27 mil.tons. by 2015-16 under scenario 1 ( Based on last five year growth) while the corresponding figures under scenario 2 (based on last 10 year gwth) were 26.02 and 28.25 mil. Tons., respectively. World fertilizer consumption is expected to rise well over 2 percent/year between 2008 and 2012 (Table 2), equivalent to an increment 19.3 million fertilizer nutrient tonnes.

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Average annual world fertilizer consumption growth rate, 2008–2012 N P2O5 K2O Africa America North America Latin America Asia West Asia South Asia East Asia Europe Central Europe West Europe East Europe & Central Asia Oceania World

4.5% 1.3% 0.7% 2.5% 3.1% 4.5% 3.3% 2.8% 0.4% 2.6% -0.3% 5.7%

3.1% 3.7% 2.6% 4.6% 2.8% 1.5% 4.9% 1.9% -0.2% 1.5% -1.0% 6.1%

2.0% 2.3% 1.0% 3.5% 3.8% 2.3% 5.9% 3.2% -0.1% 1.8% -0.7% 3.5%

2.0% 2.6%

1.0% 2.8%

0.6% 2.7%

Nitrogen The forecast is for world nitrogen fertilizer demand to increase at an annual rate of about 2.6 percent until 2012 (Figure 1), for an overall increase of 11 million tonnes N.

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FIGURE 1 Regional and subregional contribution to change in world nitrogen consumption 2008–2012 Global annual growth: 2.6% per year

Oceania, 1.0% E. Europe and C. Asia, 7.1% West Europe, -1.0% Central Europe, 2.6%

East Asia, 44.9%

Africa, 5.3%

North America, 3.6% Latin America, 6.7% West Asia, 5.6%

South Asia, 24.3%

North America will remain the world‟s largest nitrogen importer (purchasing some 7 million tonnes of nitrogen products from other regions). Consumption in the subregion is projected to grow at about 1 percent/year, and at almost 3percent/year in Latin America. West Europe is projected to show zero growth, while East Asia is forecast to record the fastest growth in the world at almost 5 percent/year. Nitrogen fertilizer consumption is also projected to grow at a high annual rate of over 4 percent in Africa and West Asia, albeit from a rather low base. South Asia‟s nitrogen fertilizer consumption is projected to increase by over 3 percent/year. The share of urea in nitrogen fertilizer consumption is expected to continue to increase.

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Phosphate The expected annual growth rate in world demand for phosphate fertilizers is about 2.8 percent until 2012 (Figure 2), for an increase of 5 million tonnes P2O5compared with 2006. About 58 percent of this growth will take place in Asia; consumption growth in South Asia is projected to surpass growth in East Asia at almost 5 percent/year. Rapid growth will also occur in East Europe and Central Asia (from a low base) and in Latin America. Phosphate fertilizer consumption will continue to decline marginally in West Europe and Central Europe. Regional and subregional contribution to change in world phosphate consumption 2008–2012

Global annual growth: 2.7% per year

E. Europe and C. Asia, 4.5% West Europe, -1.4% Central Europe, 1.0% East Asia, 24.9%

South Asia, 30.3%

Oceania, 1.2% Africa, 2.9% North America, 10.8% Latin America, 24.0%

West Asia, 1.9%

Page | 86

Potash World demand for potash fertilizers is projected to increase at an annual average rate

of

about

2.7 percent

(Figure 3),

equivalent

to

an

increment

of

3.5 million tonnes. FIGURE 3 Regional and subregional contribution to change in world potash consumption 2008–2012 Global annual growth: 2.7% per year

E. Europe and C. Asia, 4.0% West Europe, -2.2% Central Europe, 1.7%

Oceania, 0.3% Africa, 1.1% North America, 6.2% Latin America, 23.2%

West Asia, 1.0% East Asia, 41.0%

South Asia, 23.7%

Rapid growth in South Asia and Latin America is expected to continue as crop production intensifies unabatedly. India has continued a strong pattern of economic growth, and increased potash imports in response to increased demand. Sugar-cane production in Brazil has also witnessed rapid growth, driven by the use of sugar in ethanol production. In West Europe, consumption may decline slightly. However, growth in Central Europe is expected.

Page | 87

Forecasting of Demand & Supply till 2011-2012 N

P02 Surpl

yea

Dema

Supp us/

r

nd

ly

K Surpl

Dema

Deficit nd

Supp us/ ly

Surpl Dema

Deficit nd

Suppl

us/

y

Deficit

200 607

1250 13556

7

1858.1 -1049

5681

4253

-1428

2482

-

14 623.89

200 708

1272 14132

8

1915.4 -1404

6003

4387

-1616

2621

-

3 705.57

200 809

1340 14626

3

1991.7 -1223

6293

4538

-1755

2762

-

3 770.27

200 910

1342 15088

2

2078.5 -1666

6586

4693

-1893

2917

-

73 838.43

201 011

1514 15516

6

2146.2 -370

6870

4795

-2075

3075

34 928.77

201

-

112

-

1514 15941

6

2165.7 1072.2 -795

7169

4795

-2374

3238

43

6

Page | 88

Findings During 1950s and 1960s, about 2/3rd of domestic requirements of N fertilizers were met through imports. With the introduction of the yielding varieties of wheat and rice in mid-1960s, the fertilizer imports increased

8.4 Policy Implications which probably can affect MMTC Ltd. There is undisputable need for continuous rapid growth in fertilizer use especially consuming regions in the country in the coming years to increase agricultural productivity at the desired rate. In order to meet the additional demand, there is a need to increase fertilizer supplies and generate effective demand. Sustained growth in fertilizer demand mainly depends on increase in supplies (Domestic vs. imports), creation of adequate and efficient distribution network and increase in demand for fertilizers at farm level.

Page | 89

“By the above Policy reforms demand for fertilizer in India will increase drastically which will increase the imports of fertilizers in MMTC and will reduce the risk of price in domestic market and consumption. “ Other Risk Factors to effect the MMTC fertilizers import are: 1) Dollar rates: Dollar rates and the changing international markets of fertilizers will affect the margins of imports. But the subsidies provided by Indian government will be a relief. 2) Currency Volatility: Increase and decrease of dollar and rupees valuation will affect the payment policies of MMTC as the current trend of volatile market in forex is very risky. To overcome this it requires a pre study and a analysis of future Dollar vs. Rupee valuation.

Page | 90

8.5 Analysis of COAL (COKE) Industry KONARK MET COKE LIMITED (KMCL) Konark Met Coke Limited (KMCL) is setting up coke Oven Battery, By-Product Plant and Captive Power plant adjacent to NINL. Low Ash Metallurgical (LAM) Coke produced by KMCL will be sold to NINL for production of Iron & Steel and surplus Coke will be sold in domestic and overseas markets. Industry overview Global demand for LAM coke grew at an average annual rate of 6.4%, during 2000-06, as against global supply at a rate of 6% (avg. annual industry capacity utilisation being 85%) during the same period. 91% of the global demand was from markets situated in Asia, Europe and CIS during the said period. China is the World‟s largest producer of LAM coke, but with rising domestic demand from steel industries, it has largely cut down its exports thereby resulting in acute shortage of coke availability. On the other hand, India features as the net importer of Met coke due to increasing economic activity and substantial thrust on infrastructure spending. Majority of Indian steel industries do not possess captive coke manufacturing facility and thus rely on imported coke to meet their requirement. World over, the demand supply gap is significantly growing, attracting more players to enter this segment to reap the benefits. However, players owning large technically-compliant manufacturing capacities, possessing strong linkages for raw material sourcing and adopting prudent financial policies can alone withstand the competition and grow consistently in the coke manufacturing segment.

Page | 91

Power:- As per the Ministry of Power (MoP), GOI, the total installed capacity of electric power generating stations was 1,35, 006.63 MW as on Jul. 31, 2007 in India. This total capacity consisted of 33775.76 MW (24.8%) hydro power based capacity, 86,935.84 MW (64.5%) thermal power-based capacity, 4120 MW (3.1%) nuclear power based capacity and 10175.03 MW (7.6%) from other sources (including wind). India is an energy deficit country. During July 2007, India December 2007 faced an energy shortage of approximately 7.9% of total energy requirements and 13.4% of peak demand requirements. The peak demand during 2006-07 was around 272 MW which is expected to be 320 MW in FY08, as per industry sources. Prospects Future growth prospects of the company mainly depend on the successful completion of the IPO. The widening gap in demand supply of coke coupled with few players in this segment is likely to provide huge opportunities to the company. Additionally, backward integration in the form of coal mine acquisitions through group support is likely to extend synergy to its operations.

**The coal and hydrocarbons business of MMTC mainly comprises Lam coke, coking coal and steam coal. MMTC is one of the largest importers of LAM COKE in India. LAM COKE is imported by MMTC for various customers like NINL, SAIL, RINL, KIOCL, and IDCOL and also for some private companies.

Page | 92

LAM COKE Low Ash Metallurgical Coke (Met Coke) Hard Coke is actually end product, commonly

known

as

Low

Ash

Metallurgical Coke. It finds useful applications in steel plants, foundaries, blast furnaces, soda Ash manufacturing, Hindustan Zinc Ltd., Graphite industry & other chemicals. The raw material for making hard coke is Low Ash Coking Coal sourced mainly from Australian, Chinese and USA coal mines.

PRODUCT SPECIFICATION Product Specification - LAM coke

MC (% max)

1 Phosphorus0.03%(max) LAM coke

Ash (% VM (% S (% max)

max)

max)

12.5

1

0.55

M-40

M-10

CRI

(%

(%

(%

min)

max)

min)

82

7

23

CSR

(%

min) 6

Size specification Nut coke

Breeze

Page | 93

coke

and

Dust +80mm

6 % max

-20mm 4 max

%

Mean size

Size range

50 mm 10mm to 25mm

Size range