Is Commodities Transaction Tax removal in the offing?

The Commodity Transaction Tax (CTT) was introduced in the 2013 Union Budget on non-agricultural commodities traded on futures exchanges.

This was based on the premise that commodity exchanges have matured; and there is no difference between stock and commodity derivatives trading.

Therefore, the very existence of Securities Transaction Tax (STT) in stock exchanges justified the CTT, as was stated during the time of the tax announcement.

Since then, and even before that, several arguments have been put forward on the differences between the commodity and the stock exchanges; but that is immaterial now as the impact of CTT on the commodity futures markets is quite perceptible in the non-agricultural segment.

The CTT of 0.01 per cent that was levied on the sale transaction of commodity futures on non-agricultural commodities from July 1, 2013 increased the cost of transaction almost six times.

The drying of the liquidity as traders deserted the market has had a compounding effect as the impact cost of trading rose, thereby making the exchange-traded commodity market costlier still. The most perceptible impact is on the hedging efficiency. That the futures market was set up for the purpose of hedging needs no reiteration.

Hedging efficiency

Hedging efficiency measures the degree to which physical market risk can be covered by taking appropriate opposite positions in the futures market. One of the good measures of hedging efficiency is given by the Ederington’s Formula.

Following this formula, the Hedging Efficiencies of four commodities traded on the largest non-agricultural commodity exchange are given in Table 1.

Despite hedging efficiency numbers being good (to the extent of being world class) during the pre-CTT phase, there has been a substantial drop in hedging efficiency after the imposition of commodity transaction tax (CTT).

Table 2 shows the decline in liquidity caused by CTT. Liquidity is measured by the Hui-Heubel Ratio, or HH Ratio; higher the number, more illiquid is the market. Table 2 shows that HH Ratio increased, i.e. liquidity dried up, for commodities in all segments: bullion, base metals and agricultural commodities between the periods before and after the imposition of CTT.

Market buzz has it that a number of large trading firms shifted their commodity trading desks overseas following the steep increase in transaction cost due to CTT.

Lower revenue

A number of corporate hedgers also are now finding hedging in global exchanges more attractive to manage their risks rather than hedging in India, notwithstanding the currency risks they encounter in hedging abroad.

Those that are not able to trade abroad possibly are shifting to the illegal (‘dabba’) markets, as trading interest is a significant function of trading costs.

Significantly, as I had argued in a co-authored paper published in the Economic and Political Weekly (“Commodity Transaction Tax: A Recipe for Disaster, EPW, September 27, 2008), even the revenue generated from CTT would be much lower than the direct and indirect revenue loss due to the lower volumes of trade.

There is a clear case of existence of a Laffer Curve (which states that tax revenues increase with initial increases in tax rates but diminishes thereafter), and the critical point might be reached at between 10 and 15 per cent volume loss.

As we might have noted by now, the volume loss is to the tune of around 60-70 per cent. Hence, there is a high chance of revenue loss than garnering revenue.

The government is contemplating creating an International Financial Centre, which will surely have to offer tax incentives to entice international traders to trade in the country.

One such policy reform should be the removal of transaction taxes such as the CTT, as they do not exist anywhere else in the world, except for Taiwan.

Policy reforms in the field of taxation in the commodity futures market is of critical significance as various taxes and levies are a significant component in the overall cost of transaction. We can look forward to the forthcoming budget now, maybe to witness such changes.

The price of gold is taking a beating

Gold's 2015 rally was looking shaky on Wednesday with the metal falling for a second day in a row to levels last seen January 9.

The decline in the gold price came despite rising concerns that Greece may abandon the euro and Ukraine may be headed for a wider conflict with the stronger US dollar doing most of the damage.

In afternoon trade on the Comex division of the New York Mercantile Exchange gold for April delivery dropped 1.1% or $13.60 to exchange hands at $1,218.60 an ounce, at the lows for the day.

Gold's 2015 gains on the back of safe haven demand have now been trimmed to around $30 an ounce as the metal beat a steady retreat from a high of $1,307 hit on January 22.

Yields on benchmark US treasurys stayed on the higher side of 2% on Wednesday, rising for the sixth straight session to a one month high.

It's an indication that markets are expecting a rate hike by the US Federal Reserve over the summer months. Higher yields raises the opportunity costs of holding gold because the metal provides no income.

Higher rates also boost the value of the US dollar – already trading at multi-year highs – which usually move in the opposite direction of the gold price.

On Wednesday the US currency edged higher again coming close 12-year highs against the currencies of its major trading partners hit late January. The dollar index has strengthened by 17.4% over the last year.

Germany's Commerzbank on Wednesday predicted a gold price of $1,250 an ounce by the end of the year reports Platts News.

The bank said that while it believes that the gold price is likely to continue benefiting from the "ultra-loose monetary policy pursued by the ECB, we expect the gold price to suffer a renewed setback in the summer months because the market is underestimating the [US Federal Reserve's] interest rate hikes."

In Europe, Wednesday's crucial meeting of European finance ministers to discuss the future of the Greek bailout program may offer a surprise to markets, while the outcome of urgent peace talks between Russian and Ukraine happening at the same time is also being closely watched.

Gold investors 'putting aside fundamentals'

Gold price weakness returned on Tuesday as improving prospects of a Greek debt deal dampens safe haven buying and a rise in bond yields in the US make the metal less attractive as an investment.

In afternoon trade on the Comex division of the New York Mercantile Exchange gold for April delivery shed 0.7% or $8.90 to exchange hands at $1,232.60 an ounce, not far off its lows for the day.

Gold's 2015 gains – the metal is still up nearly 4% or over $48 since the start of the year – have been ascribed to safe haven buying amid the West-Russian standoff over Ukraine, a slowing global economy and a debt crisis in the Eurozone.

A stronger than expected jobs report in the US on Friday provided a boost to equities and caused a bounce in bond yields, with benchmark US treasurys on Tuesday scaling 2% for the first time in a month. Higher yields raises the opportunity costs of holding gold because the metal provides no income.

Higher rates also boost the value of the dollar – already trading at multi-year highs – which usually move in the opposite direction of the gold price.

India and China are not buying right now, our books are not full

On Tuesday the greenback edged higher staying in range of 12-year highs against the currencies of major US trading partners hit late January. The dollar index has strengthened by more than 17% over the last year.

Platts quotes the CEO of MKS Frederic Panizzuti as saying that concern about global risks is the main driver of the gold price:

"We have put fundamentals aside in our gold outlook for 2015," Panizzuti said. "Geopolitics, the perception of risk and even emotional risk from investors are the main drivers this year."

Swiss-based MKS is one of the world's largest refiners and Panizzuti said this year's rise in the gold prize has been largely Exchange Traded Funds investing in the precious metal rather than physical demand that has driven the market:

"India and China are not buying right now, our books are not full. But we expect to see some buying from March and April onwards."

Panizzuti was the winner in 2014 of the London Bullion Market Association's gold forecasting contest with his estimate of $1,262 per ounce for the year with the actual average over the 12 months of $1,267.

For this year Panizutti is the second most bullish of the 35 analysts with an annual average prediction of $1,292 per ounce and a range of $1,150 and $1,390.

Overall the LBMA survey indicates gold will trade in a narrow band this year to average $1,211 a troy ounce with a range between $1,085 and $1,356 during 2015.

Nyrstar Sees Zinc Prices Rising as Shortage Looms by End of Year

Nyrstar NV, the world’s largest refined- zinc producer, expects the price of the metal to increase further after the 500,000 metric ton Century mine in Australia shuts by the end of the year.

"We are heading into a period that is forecast to be short on both the concentrate market and the refined metal market,” Heinz Eigner, acting chief executive officer of Belgium-based Nyrstar, said in a phone interview. “This double deficit” is pushing the metal into a “very strong price range,” he said.
Zinc prices gained 6 percent last year amid speculation supply will fall short of demand as some mines shut. Stockpiles in warehouses tracked by the London Metal Exchange are at the lowest since October 2010. Strong consumer demand has helped buoy zinc, Australia & New Zealand Banking Group Ltd. said in a report Thursday.

Century, Australia’s largest open-cut zinc mine operated by MMG Ltd., the Hong Kong-listed unit of China’s biggest state-owned metals trader, is scheduled to shut in the third quarter.

"We expect for 2015 a well supplied concentrate market but then later this year Century mine will be depleting,” said Eigner, who took over as CEO when Roland Junck resigned in November, three weeks after Trafigura Beheer BV raised its stake in the zinc producer to 15.3 percent. “And that is 500,000 tons off the market, so just Century alone will have a significant impact.”

Commodities Transaction Tax should be reduced: Religare Sec

Budget should take steps to make commodities markets in India more vibrant. Taxation issues should be resolved and more investments should be encouraged into real infrastructure such as warehouses, cold storage logistics to ensure low wastage.

Any budget raises hopes, especially the first full-fledged one of a new government. This team has also had the privilege of a run up of 9 months to the budget after winning the elections, which has given them enough time to understand the issues at hand. And I must say the time has been utilized well.

On the commodities front, some of the expectations are old while others are new. But the ultimate aim of the budget should be to free our commodity markets and integrate them into the global economy to take maximum advantage of opportunities and get international buy and sell prices commensurate with our production and consumption numbers. While global factors significantly affect commodity prices of bullion, metals and energy, prices of agri-commodities are more affected by domestic policies because we provide them a level of necessary protection. Like every earlier year, agriculture will be a key focus area in this budget and this is an opportunity to address the most crucial issues in this sector.

The fundamental issue is, and has always been, that of adequate funding to lay out effective and comprehensive infrastructure for farming to improve productivity and permanently bring down food inflation. Institutional credit by way of availability of seeds, fertilizers and such at low prices will help raise productivity. Also, the Mandi Acts in different states need to be revisited and a national Act allowing free movement of good, perhaps with a single pay-point and a smart card to track goods movement, should be mooted. Real implementation of GST is a step in that direction. Then, wastage adds 30% to the cost of farm products and that is largely due to lack of suitable storage infrastructure; a policy to encourage a supply chain network – of warehouses and cold chains for example – will go a long way in holding prices low and ensuring availability everywhere. In fact, one of the biggest factors to focus on is storage of goods across the country which, given the scale and size of the mission and the investment and project execution skills required, will work best in Public Private Partnership format. The scope should include not only storage but also procurement and distribution for an integrated approach and the budget is the right platform to address this national requirement. 

The key message in the budget should be that we are a business-friendly globalized market and the medium term goal should be the ability to become a price-setter in the commodities in which we are among the larger producers or consumers of the commodity e.g. wheat, sugar and vegetable oils. Negotiable warehouse receipts are soon to become reality with the setting up of the Warehousing Regulator and incentives for creating infrastructure to support physical commodities trade will make it a winning combination. 

The contentious Commodities Transaction Tax (CTT) should be reduced to Rs 1 per Crore of trading to encourage the fledgling but high-potential new industry and the amount collected should be diverted to improving warehousing & infrastructure facilities. There is also a strong need for a structured and common clearing and settlement system across products – equity, commodity and currency. This has been touched upon by earlier governments but should be implemented in earnest. This will strengthen our risk management systems and reduce transaction costs in markets. There is also a need to increase market participation by allowing banks to hedge the commodities they have exposure in their lending book. Allowing FIIs and MFs will add depth, prevent price manipulation and facilitate hedging by large corporates. And these participants will need new products like options and indices to enable efficient markets. Importantly , primary sector reforms are necessary including enabling sale on competitive market prices as against minimum support prices guaranteed by the government. 

The wish list is long but a firm start with a clear road map will be beneficial for India in the long run.

Commerzbank: Unexpectedly Tight Market Should Help Copper Recover

Despite falling copper prices and rising inventories, Commerzbank (ETR:CBK) is suggesting that the market for the red metal may not be as oversupplied as many believe.

In a commodity research note put out on Friday, the firm admits that copper prices fell at the end of last month to five-and-a-half-year lows on the back of pressure from falling oil prices, concern over an economic slowdown in China, rising inventories and pressure from “speculative financial investors.”

But despite all that, Commerzbank is predicting that an “unexpectedly tight market” could help copper recover — “perhaps fairly strongly given the latest price slide.”

To be sure, since the end of last year inventories on the Shanghai Futures Exchange have gone up by 55 percent, to 137,000 tonnes, while inventories on the London Metal Exchange (LME) have risen over 70 percent, to 285,000 tonnes.

On top of that, Commerzbank suggests that the red metal has been “facing headwind” from financial investors, with money managers betting on copper prices to fall on the COMEX for almost the past five months, and net long positions at their lowest since last July on the LME.

However, Commerzbank believes that the situation might not be as dire as it seems.

“In our opinion, copper has now been oversold and many risks are already priced in,” the firm states in its report. “Any shift in sentiment among speculative financial investors would no doubt contribute to significantly rising copper prices.”

Commerzbank identifies several points to support its case:

•Market tighter than it looks — According to data from the International Copper Study Group (ICSG), the global copper market was in a “seasonally adjusted deficit of 532,000 [tonnes]” for the first 10 months of last year. The organization also reported tight supplies of high-grade copper scrap.

•Surplus predictions optimistic — While the ICSG is predicting a surplus, Commerzbank isn’t so sure. It notes in its report that wage negotiations are set to take place for mineworkers in Chile, the world’s largest copper producer, and that production could be curbed if strikes occur. Furthermore, the firm points out that Codelco and Freeport-McMoRan (NYSE:FCX9) have cut investments due to low prices for the red metal, and suggests that “hardly any new projects are likely to be pushed forward at the current low prices.”

•Is Chinese demand really falling? — Despite slower economic growth, Commerzbank sees market watchers anticipating stimulus measures from China’s government. For example, as others have previously pointed out10, the country recently announced an investment of roughly $70 billion in electrical infrastructure, and that will require plenty of copper. Beyond that, Commerzbank believes that current low prices could spur demand as China’s State Reserve Bureau could take advantage of the situation to buy up copper.
Of course, Commerzbank isn’t the only entity to be making such arguments as of late. Ian Parkinson11 of GMP Securities has also said that projections for a surplus could be optimistic, and that current prices are not high enough to incentivize new production. Certainly, that could be problematic down the road.

Similarly, Lawrence Roulston12 of Resource Opportunities has admonished investors not to get hung up on short-term copper prices, and has suggested that worries of a slowdown in China could be overstated.

All in all, Commerzbank sees the “current pessimism as exaggerated” for copper, and anticipates copper rising to $6,500 per tonne by the end of 2015.

US Lead usage rises during Jan-Nov; EU down by 1.6

Lead usage In the United States increased by 3.9% during January to November, while demand Europe declined by 1.6%.

According to International Lead and Zinc Study Group, an increase in global demand for refined zinc metal of 5.4% was primarily a consequence of a reported rise in Chinese apparent demand of 10.5% during January to November.

The global market for refined zinc metal was in deficit by 255kt over the eleven months from January to November 2014 with total reported inventories declining by 326kt over the same period, said ILZSG report.

Falls in zinc mine output in Australia, Canada, India, Ireland and Namibia were more than balanced by increases in China, Mexico, Peru, Sweden and the United Sates resulting in an overall global rise of 1.9%.

Despite reductions in India and the United States, world refined zinc metal production rose by 4.2%. This was due mainly to higher output in China.