How Are Prices Determined In The Commodities Market In India | Motilal Oswal

How Are Prices Determined In The Commodities Market In India

Unlike manufactured products and services, commodities are products that are produced from economic activities that are primary in nature, like drilling, agriculture, mining, etc. As stocks are traded, so are commodities. The intention of trading is to find out about the authentic price of a commodity, speculating on profit, or gauging cost risk. The concept of this kind of  trading goes back several years, Amsterdam taking the lead with its stock exchange in commodities trading. 

  • Commodities Market in India

Today’s commodities market is advanced, using savvy financial devices like derivatives, futures, options, swaps, etc. Commonly, all over the world, the commodities traded are gold, silver, natural gas, copper, soya bean, corn and crude oil, etc. In India, there are six commodity exchanges, the most prominent being the National Commodity and Derivative Exchange and the Multi Commodity Exchange. On these exchanges, commodity trading takes place. 

  • Who are the Participants?

If you wish to know how prices are determined for a commodity in India, you should be aware of the participants. The actions of these participants are the driving force of market prices. Basically, two kinds exist:

1. Hedgers
2. Speculators

Hedgers are manufacturers/industries that have a real need for a large supply of raw material. They must acquire these at prices that are relatively stable. For example, construction industries need steel. In order to hedge against price changes, industries may sign up for future purchases, ensuring that future demands for steel are met at the current  price. Hence, a pattern of predictability of prices takes place, and this is valued by manufacturers and industries, aiding in planning future operations proficiently. Speculators in India are those who don’t have any real need for a commodity in India. They are simply investors wanting to make gains/profits from fluctuations in prices. They typically indulge in commodities trading, buying low-priced commodities, and selling them when prices rise. 

  • Price Determination

Just like online trading of stocks, commodity online trading has taken India by storm. Just as the prices of stocks vary, so do commodities. These are the key determinants of commodity prices:

1. Factors of Demand and Supply - The principles of demand and supply affect commodity prices, depending on the behaviour of traders. When the buyers for a specific commodity are in the majority, compared to sellers, commodity prices rise, and vice versa. 

2. External Conditions - Other factors like certain conditions may affect demand and supply too. For instance, the cost of heating may go up if the weather is cold. This leads to a high demand for natural gas as a commodity, increasing its price.

3. Eco-Political Factors - Politics and economics of a nation play a role in price variation  in the commodities market. For example, political/economic instability in a single or more OPEC (Organization of Petroleum Exporting Countries) nations may affect crude oil prices, as most of this commodity comes from here. 

Speculation - Speculators involved in commodity trading trade on the belief that a commodity may be promising or not. This affects some commodities prices to vary.

Related Articles: Can the commodity markets provide cues for equity trading | Beginners Guide to Agri Commodity Trading | 5 Successful Commodity Trading Strategies | Role of Commodity Markets In India 

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