Classifications Of Commodities

Commodities are commonly classified into four types:

Bullions:

The word bullion is used for a precious commodity like gold, silver, etc. This is because a precious metal like gold has a very high retention value. A bullion’s value does not diminish quickly.

1.Gold – Gold is one of the oldest precious metals which is known to humans. Gold is used as a commodity, a currency, and also as an investment vehicle. It is also the most popular bullion commodity that trades in the markets. Gold is also used as a form of jewellery. Recently, paper gold has emerged as a good investment vehicle. A major reason is that unlike physical gold, paper gold has less selling costs and no storage costs, hence providing better returns.

2.Platinum – Platinum is a very important precious metal and has multiple uses. Just to name a few, platinum can be used as jewellery, it can be used in electronics, and also in automobiles. There are platinum futures contracts which trade in many exchanges, one of the major exchanges where platinum trades is the Tokyo Commodity Exchange (TCE).

3.Silver – Silver can be used in industries like photography, fashion, and electrical industry to name a few. Gold and silver generally move in the same directions. The main source of silver is lead ore.

Base Metals:

A metal is classified as a base metal if it is not considered a precious metal like gold or silver:

1.Copper– Copper (chemical symbol - Cu) is a malleable and ductile metallic element which is an excellent conductor of heat and electricity. It ranks 3rd in world consumption basket for metals, coming after steel and aluminium. Copper is a highly traded commodity.

2.Zinc- Zinc (chemical symbol- Zn) is a bluish-white lustrous metal, and is normally covered with a white coating. It is the 4th most common metal in use. Zinc can be recycled indefinitely.

3.Lead– Lead is one of the most sustainable and recyclable commodities available in the market. Lead is an important component in the production of batteries.  

4.Nickel- Nickel is used in various industries such as engineering, electrical, infrastructure, automobile, packaging, etc. Nickel is a very volatile commodity because of its high demand and low supply.

5.Aluminium– Aluminium is a chemical element, and is the most widely used non – ferrous metal. Theoretically, it is possible to recycle aluminium indefinitely without compromising any of its qualities.

Energy:

1.Crude Oil - Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Almost all industries are dependent on oil in one way or another. Oil & lubricants, agriculture, transportation, petrochemicals, paints, etc. are largely and directly affected by movement in oil prices. Prices of crude oil are known to be highly volatile.

2.Natural gas – Natural gas is a form of fossil energy and is formed deep beneath the Earth’s surface. 

Other forms of energy commodities include Heating Oil, Gasoline, Electricity, etc.

Argo Commodities:

There are several types of agro commodities that traded in a commodity market:

1.Plantation: Rubber.
2.Cereal: Barley, Wheat and Maize.
3.Pulses: Chana.
4.Spices: Cardamom, Coriander, Turmeric Oil & Oil.
5.Seeds: Crude Palm Oil, Soya Bean, KapasiaKhalli, Refined Soya Oil.
6.Others: Kapas, Cotton, Gaur, Potato, Sugar.

So, you know how commodities are classified in India. As they are traded over recongnised exchanges: these commodities are highly regulated. But who are they? Let’s find out:

Regulatory Framework of Commodities markets in India:

1.Forward Contract (Regulation) Act, 1952:

All types of forward contract in commodities are governed by the Forward Contract (Regulation) Act, 1952. After a merger with SEBI, the commodity derivatives are governed by Securities Contracts (Regulation) Act, 1956.

2.Forward Market Commission:

The Forward Markets Commission (FMC) was the chief regulator of commodity futures markets in India.

A separate division: Commodity Derivatives Market Regulation Department (CDMRD) has been formed in SEBI to manage the functioning of commodity derivatives in India.

3.About SEBI:

The Preamble of the Securities and Exchange Board of India (SEBI) describes the basic functions as, "to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”.

After learning the different classifications of commodities & their regulatory framework next, let us understand the various factors that affect the price of a commodity.