Cotton Trading @ NSEL

NSEL Cotton Meet – 2008 Mumbai

Ashok Mittal,Karvy Comtrade Ltd.,Hyderabad

AgendaAbout Karvy Comtrade

Trading at NSEL

Cotton: An Introduction

Trends

Global

Domestic

Textile Industry

Price Analysis & Forecasts

Incorporated on November 20, 2003

A wholly owned subsidiary of KSBL

Member – NSEL, MCX, NCDEX and NMCE

Also an active player in delivery based trading

Presently operating through 355 branches

400+ strong team exclusively for commodities

KARVY Comtrade Ltd

Our Commitment to Quality

Karvy Comtrade Ltd. is the first corporate commodity broker in India to be awarded the ISO 9001:2000 certificate

Online Trading platform

Comprehensive research

Customized investment strategies

Research reports

Dedicated delivery desk

C&F services

Procurement services

Guidance through out the delivery process

Dedicated Back office services

Surveillance & Risk management services

Products & Services

Products & Services

Products & Services contd…

Our Research CoverageMagazine

– Karvy Comtrade’s “Invest & Harvest”Monthly articles

– Commodities & Derivatives Magazine– Minerals and Metals– Karvy the Finapolis – Karvy Bazaar Baatein

Daily reports – www.thebulliondesk.com– Our Reports are available on BLOOMBERG with key word

KCTL <GO> & Reuters KnowledgePrint & Electronic media coverage for Views on commodities

– Business Standard, Businessline, EconomicTimes etc., – Newswire18, Bloomberg, Reuters, CNBC, NDTV Profit, Zee

business etc.,

Though speculation is integral to human behavior, we are

responsible to convert such speculative instinct into investment

based trading.

Investment should be in “Active” Instrument and not in “ Passive

Instrument”

Clients can maximize returns on investment by clubbing trading skills

with investment base, as the volatile markets give multiple

opportunities every day

In “Passive Investment”, investors can just watch their value being

eroded in a falling market without any tool to protect themselves

Leveraged positions create investors’ panic in volatile markets

whereas investment based position provide opportunity under the

same market conditions

Online Spot Trading - Our perspective

Wealth creation for the clients

Safe and secured investment avenues for clients, Easy

liquidity, Negligible Entry and Exit Load

Promote Savings and investment rather than speculation:

Investment thrills but Speculation Kills

Investment is a Life saving device but speculation and

leveraging is the weapon for mass destruction

Portfolio diversification

Benefits

Delivery in National Spot Exchange

Strategy should be : Buy Low and Sale High with a target

to earn 10% every round trip

This can be done at least 4- 5 times in a year resulting into

an earning between 10 to 50 % per annum

This is not a rocket science, this can be easily achieved by

investors. Caution is no leverage position, avoidance of

over buying and over trading, no panic with sudden price

movements

This will lead to wealth creation for the clients

The strategy

Getting started …

Participants

Farmers, Traders, Exporters, Importers, Corporate,

Cooperatives, Ginning mills, Textile mills, Investors

Procedure

Know Your Client (KYC)

Connectivity

Funds

Know Your Client (KYC) For individuals

Pan Card, Photograph, Identity Proof, Address Proof,

Financial Appraisal Document

For Corporate

Photograph of Authorized Signatory, Board Resolution,

Proof of Date of Incorporation, Memorandum and

Articles of Association, Annual Reports, Income Tax

Pan, Identity Proof of the Directors, Proof of Residence,

Details of Directors/promotors, Details of Sales Tax

Registration if Any

Connectivity Through

Internet

Leased Line

VSAT

Margin

Initial margin - 6-10%

Delivery period margin – 10-15%

Cotton – The Recent Trends

Year 2008 saw roller coaster ride in Cotton prices

The bench mark ICE (NYBOT) futures showcased higher volatility by trading in the range of 92-36 cents per pound

Domestic cotton made all time highs of Rs.29000 - 29500 per candy in third quarter and fell to 21000 in November

Economic slowdown and financial crisis resulted in consecutive quarterly fall at ICE

Lower output forecast across world failed to provide any support to prices

Domestic textile industry facing crisis over higher MSP and lower export demand

About cotton

Accounts for 40 percent of total global fiber production

Discovered more than 4,000 years ago

Cotton fiber is a unicellular seed hair composed of basically 92-95% of pure cellulose

An important fiber crop and one of largest globally traded commodity

Mostly harvested in second half of the calendar year

Cotton products: Fiber and seed

Fiber : Textiles

Seed: Oil extraction (Edible oil) and Cake (cattle feed)

Classification – based on fiber length

Emergence of Bt cotton

Cotton-Global trends

World Area and Production averaged at 33 million hectares

and 23 million tonnes in this decade

Highest output was in 2006-07 at 26.56 million tonnes

China is largest producer (32%) and importer (30%)

US is third largest producer (12%) and largest exporter

(35%)

India has overtaken US in terms of production in 2007-08

to become second largest producer (22%)

Production is in declining trend in US and rising in

developing countries

World Area and Production

Source: USDA

Major Cotton producers

World cotton scenario

YearArea

(MM Ha)

Beg. stocks (MMT)

Production (MMT)

Imports (MMT)

Total supply (MMT)

Exports (MMT)

2000-01 32.02 11.13 19.40 5.71 36.24 5.72

2001-02 33.73 10.75 21.49 6.38 38.61 6.33

2002-03 30.75 11.91 19.81 6.56 38.27 6.60

2003-04 32.31 10.41 21.06 7.40 38.88 7.24

2004-05 35.71 10.49 26.44 7.28 44.21 7.62

2005-06 34.74 13.19 25.38 9.67 48.23 9.70

2006-07 34.71 13.55 26.56 8.15 48.26 8.08

2007-08 33.26 13.68 26.25 8.28 48.21 8.38

2008-09* 31.57 13.36 24.29 7.14 44.78 7.14

Source: USDA. *Estimates for 2008-09 released by USDA on December 11th.

Cultivated mainly in kharif season (small quantity in rabi season)

Covers about 7 percent of total kharif crop acreage

Area and Production averaged at 8.7 million hectares and 222 lakh bale (3.78 million tonnes)

Highest output recorded in 2007-08 at 315 lakh bales

Largest producing states – Gujarat (38%), Maharashtra (19%) and AP (13%)

Textile mills mainly located in southern states

India has emerged as a major player in world cotton market

Export markets for India are China, Bangladesh and other developing countries

Cotton-Indian Trends

India Cotton Area and Production

Source: USDA

India cotton scenario 2005-06

2006-07

2007-08

2008-09*

Area 8.9 9.2 9.6 9.4

Beginning stocks 112 103 98 90

Production 244 279 315 307

Imports 5 6 6 6

Total supply 361 388 419 404

Exports 44 58 92 64

Domestic consumption 214 232 234 224

Ending stocks 103 98 92 115

Stock to use (% ) 40.02 33.81 28.00 40.00

Source: USDA. *Estimates for 2008-09 released by USDA on December 11th.

Growth in Cotton

India (CAGR %) World(CAGR %)

Area 1.89 0.27

Beginning stocks 9.33 3.30

Production 12.33 3.86

Imports -18.39 4.03

Total Supply 9.93 3.72

Exports 97.18 4.14

consumption 4.81 3.90

Ending stocks 11.63 3.14

Stock to Use % 1.99 -0.85

Note: Data analyzed for period of 2000-01 to 2008-09

Region-wise cotton output (2008-09*)State Area

(Lakh Ha)Production (Lakh bales)

Yield (Kgs/Ha)

Punjab 5.60 20 607Haryana 4.18 15 610

Rajasthan 2.17 8 627

North Total 11.95 43 612Gujarat 24.17 110 774

Maharashtra 31.33 62 336

MP 6.43 20 529

AP 13.19 58 748Karnataka 3.35 10 507

Tamil Nadu 1.20 5 708Others 0.98 2 347

Total   310  

Loose Lint   12  Grand Total 92.60 322 591

Source: Cotton Corporation of India *Estimates as on 16 October

A Brief on Indian Textile Industry

Contributes to 4 % of GDP and 14 % of industrial

production and 16 % of total exports earnings

Cotton constitutes 60% of textile consumption

Employment to over 15 million people

End of Multi Fiber Agreement (MFA) in 2005-

India's share of exports to the world expected to increase

from the current 4 per cent to around 7 per cent by 2012

High input cost and low returns due to higher raw cotton

prices and weak export sales

Domestic cotton price seasonality

Note: Monthly lint cotton prices of S-6 for last ten years taken for analysis

Yearly average prices and % change

Source: CCI (Cotton Lint prices announced by Cotton Association of India for Shankar – 6)

Price Correlation Matrix

  Cotlook A NYBOTDomestic prices

Cotlook A 1.00 0.91 0.57

NYBOT 0.91 1.00 0.53

Domestic prices 0.57 0.53 1.00

Note: Monthly prices 1996-97 -2007-08

Cotlook A Index and NYBOT futures have good correction

at 0.91 as both represents global cotton market

Domestic prices are independent of global factors

Minimum Support Price (MSP)

Increased by 40-48 percent for 2008-09

MSP for Shankar – 6 fixed at Rs 2850 per quintal

compare to Rs2055

Better price to farmers at a time of higher input costs and

incidents of suicides

Farmers prefer to sell to Government procurement

agencies rather than ginning mills

Double blow to the mills – Higher MSP and lower exports

Ginning mills are running below 50 % of their capacity

Efforts to protect the interest of mills – Government

intervention

Arrivals and procurement in current season

Daily arrivals are around 1.5-2 lakh bales and it may

extend till January end

As per CCI, total cotton arrivals till December 13th were

85.88 lakh bales compared to 106.6 lakh bales for the

same period of last year

CCI has procured about 30 lakh bales and targeted to

procure 100 lakh bales in this season

Likely to face storage problems with huge quantity of

purchase and may go slow

According to media quote, CCI may suffer loss of Rs2065

crores for procurement

Cotton forecasts for 2008-09 – ICAC as on 1st December

Global production expected to decrease by six per cent

to 24.6 Million tonnes

Global trade is likely to fall by 12 per cent to 7.3 million

tonnes

World imports are likely to fall by seven per cent to 5.4

Million tonnes

Chinese imports are likely to fall by 24 per cent to 1.9

Million tonnes

Global mill use is expected to fall by 6% to 24.9 Million

tonnes

USDA forecasts as on 11th December   US India China Global

Production  

2007-08 4.18 5.35 8.05 26.24

2008-09 2.96 5.22 7.94 24.28

% change -29.19 -2.43 -1.37 -7.47

Consumption  

2007-08 1.00 3.98 11.32 26.85

2008-09 0.94 3.81 10.77 25.38

% change -6.40 -4.27 -4.86 -5.47

Ending stocks  

2007-08 2.18 1.52 4.24 13.35

2008-09 1.54 1.96 3.90 12.79

% change -29.36 28.95 -8.02 -4.19

Exports  

2007-08 2.97 1.61   8.42

2008-09 2.66 1.08   7.14

% change -10.44 -32.92   -15.20

Imports  

2007-08     2.51 8.28

2008-09     1.96 7.14

% change     -21.91 -13.77

Source: USDA

Price outlook for Indian Cotton

Current market price: Rs 21500-21600 per candy

Short term(1-2 months) – Weak

- Rs18500 -19000 per candy

Long term (6-8 months) – Strong

- Rs26000 per candy

Short term Outlook - Bearish

Weak demand from ginning mills and textile sector

Low export demand and less parity with global price

Higher arrivals in domestic markets – around 2 lakh

bales per day for another one month

Falling global cotton prices

long term Outlook - Bullish

Higher MSP – 40-48% rise

Anticipation of revival of the global economy – measures

taken by Governments

Global shortage of cotton –

World output to decline by 7.47%

US output to decline by 29.19%

India can fulfill the global shortage

Weakening Rupee

Declining arrivals – from February onwards

Technical Analysis – ICE Cotton futures

The chart pattern says prices are likely to trade lower in

the medium term having support at 28.20 (31-10-01 low)

On break of 28.20, it could extend to 20 levels

Likewise, the crucial resistance can be seen around 52

and 60 levels

MACD signals a downtrend, and monthly MACD is

treading below the nine-month signal line

Monthly RSI-14 at 0.38

Technical Outlook (CMP 44 cents per pound)

Short term: 36 then 30

Long term: 60 then 70

Technical Analysis – ICE Cotton futures Contd…

Name Designation

E-mail Landline

Mobile No.

Ashok Mittal

Country Head & Vice President

ashok@karvy.com 040-23440621

9949139991

Harish Galipelli

AGM harish@karvy.com 040-23388707

9885721003

Chowda Reddy

Dy. Manager chowdareddy@karvy.com 040-23388707

9885882242

Shyam Rastogi

Dy. Manager Shyam.rastogi@karvy.com

9177401119

Vishal Mishra

Dy. Manager Vishal.mishra@karvy.com 9177401899

Contact Details

Thank You

Contact DetailsKarvy Comtrade LtdKarvy Centre, 46, Avenue 4, Street 1, Banjara HillsHyderabad 500 034Mail: commodity@karvy.com Website: www.karvycomtrade.com Toll Free No: 1800 425 1900