Crude Palm Oil Up 1.95% On Spot Demand: Article Explained

Posted on October 15, 2012 in Business and Economy

About the column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.

By Naman Sanghvi & Sangeet Agarwal:

Link to Original Article

Original Article

Crude palm oil up 1.95% on spot demand. Firm overseas trend influences prices.Crude palm oil futures prices rose by Rs 10.60 to Rs 551.90 per 10 kg today as speculators created fresh positions on expectations of a rise in spot demand. A firm trend in overseas markets influenced crude palm oil prices in the futures market.

At the Multi Commodity Exchange, crude palm oil for October rose by Rs 10.60, or 1.95%, to Rs 551.90 per 10 kg, with a trading volume of 513 lots.The September contract moved up by Rs 10.10, or 1.87%, to Rs 548.40 per 10 kg, with a business volume of 507 lots.

Marketmen said fresh buying by speculators on hopes of a pickup in spot demand led to the rise in crude palm oil futures prices. A firm global trend influenced the market sentiment, they added.

Explanation


The word ‘futures’ here refers to a futures contract- a futures market is a standardized contract between two parties to buy or sell a specified asset/ commodity for a price agreed today with delivery and payment occurring at a specified future date. Futures is a huge market and an important tool in financial markets.

The contracts are negotiated at a futures exchange, which acts as an intermediary between the two parties and acts so as to minimize risk of default. The exchange requires both parties to put up an initial amount of cash – margin. These futures are tradable. The futures price will generally change daily, and the difference in the prior agreed-upon price and the daily futures price is settled daily. The exchange will draw money out of one party’s margin account and put it into the others so that each party has the appropriate daily loss or profit. If the margin account goes below a certain value, then a margin call is made and the account owner must replenish the margin account.

This entire process is known as marking to market. Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value or the current value, and yet the commodity has been traded and passed through various hands (since any gain or loss has already been previously settled by marking to market). — (as explained on Wikipedia)

A position is when you buy/ sell a tradable commodity and ‘take a position’ on it. If you buy a commodity at INR 100, hoping to sell it in the near future. You might sell it after 1 hour at the current spot price, or you might say I will hold this commodity for 3 days because the value will go up to INR 125. Either ways what you have done is taken a position on that commodity. For some reason speculators believed that the demand of crude palm oil would rise making them take aggressive positions which shot up the price of crude palm oil. When you demand more of one commodity, and when this more is done by multiple people in huge numbers; you create more demand which means the product is more valuable. This shoots up the price as more investors try to buy in with hopes of greater profits.

These speculations are always based on reports, analysis and news releases. If a well known company A announces a merger with another not so well known company B; then in the immediate future, share value of company B rises as investors perceive it to be a good investment because company A — a well reputed firm has seen something in company B (this is a very simple explanation to put forth the concept and is not a fixed rule, and as it depends on various company specific variables this might not happen always for all companies.) Likewise a government release banning/ making cheaper a particular commodity can influence the share value of a company which is dependent on that commodity. For eg. – if the government announces a huge increase in taxes on steel; then share value of steel companies listed in that country will go down as investors find this to be a negative impact. Global and national trends both determine prices. For eg. – If demand for crude palm oil in international markets has been steadily increasing, then manufacturers would be lured by higher profits into tending to export more. As the commodity’s demand has risen, traders would buy and take a fresh position on crude palm oil in domestic markets in the hope of selling at a higher price and cashing in an increase in demand.

Multi Commodity Exchange is India’s largest commodity exchange and 5th largest in the world. It offers futures trading in commodities like metal, agricultural commodities, energy, etc. The turnover of the exchange for the fiscal year 2009 was US$ 1.24 trillion. In February 2012, MCX became the first Indian exchange to come out with an IPO- raising around $134 million.

[box bg=”#fdf78c” color=”#000″]About the Column: In our column “Bull’s Eye“, we take up articles from business dailies like Economic times and Business Standard, and explain them. In each article, we cover an economic/financial concept and a market occurring that the article is focused around; and explain it in the context of that news update.To read more from the column, click here.[/box]

 

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