The National Commodity and Derivatives Exchange Ltd (NCDEX), a leading commodity exchange in India, wants to kick off futures trading in cement.
If the proposal gets approved by the Forward Markets Commission (FMC), the commodity markets regulator, it will be the first instance of cement futures trading in any part of the world.
The Building Material Exchange in China, which got merged with the Zhengzhou Commodity Exchange in May 1995, experimented with cement futures contracts in early 1990s, but the results of that experiment remain unclear.
NCDEX is pushing for cement because it believes that futures trading will provide a hedge to bulk cement consumers against volatility in prices. A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price.
Cement prices have risen by 30-34% in different regions of India in the past year.
FMC, however, has not given its go-ahead yet. In fact, the regulator, has raised concerns about the futures trading in cement on three grounds. First, it is a processed commodity. Second, there is no global precedent. And, finally, cement is a branded commodity.
“We are examining the proposal,” says Anupam Mishra, a director of the commission. “It is still under consideration. There is no time-frame to approve it,” he adds.
Another FMC official, who did not wish to be named, says: “Our study shows that China only experimented with cement futures contracts, but we have no further information on it and it’s difficult to get information from China. Commodities are prone to manipulation. So, we have to do a detailed analysis of the impact on all parties involved before taking any decision.”
NCDEX managing director P.H. Ravikumar says futures trading will bring down volatility of prices in the spot market. “Our experience in agricultural commodities futures trading shows that volatility in spot prices gets reduced by about 50%,” he says. According to him, cement prices have been increasing by more than 10% annually in the past three years. Exchange officials say that there are other processed commodities such as sugar, steel ingots, polymers, gold, silver, copper cathode and aluminium ingots that are being traded on commodity bourses.
Cement manufacturers are keenly watching this development as it has become a politically sensitive commodity in recent months.
In the February Union budget, the government had introduced a dual excise duty structure, increasing duty from Rs400 per tonne to Rs600 per tonne for cement sold at a retail price of above Rs190 for a 50kg bag and reducing it to Rs300 per tonne for the commodity sold below Rs190 for a 50kg bag.
Following this, cement manufacturers raised the retail price by Rs10-12 per 50kg bag as nowhere in India the commodity was sold at Rs190. Despite the pressure put up by the government, the manufacturers did not roll back the price hike. In fact, finance minister P. Chidambaram was forced to change the excise duty structure in May as the rising prices were adding to the inflationary pressures. The new system introduced a 12% ad valorem duty on cement that is being sold below Rs250 per bag. This has brought down the prices by Rs3-5 across India, except for Mumbai, the largest cement market, where the commodity is sold above Rs250 for a 50kg bag.
Nearly 50% of around 148 million tonnes cement manufactured in India is sold directly to builders, contractors, infrastructure projects, government purchases and industry purchases known as “non-trade” segment. The order size in the non-trade segment starts from 50-100 tonnes and go up to 1,000 tonnes. With rising cement prices, NCDEX says that there is a need for a hedging instrument for the bulk consumers in the non-trade segment. Retail buyers are unlikely to opt for hedging.
India is the world’s second largest cement market, next to China, with the market size pegged at Rs55,000 crore. While a 50kg bag of cement in Mumbai still sells for about Rs250, the nationwide average price is around Rs215-220. With additional capacities being added, cement prices are expected to fall in the next few years.
“In such a situation, the futures could be a natural hedge for cement manufacturers as well,” adds an NCDEX official who did not want to be named. The builders community has been pushing the exchange for such a product for long, he claims.
However, cement industry veterans don’t seem to be very excited about the idea.
“I don’t think there is any merit in futures market for cement,” says Anil Singhvi, who recently resigned as managing director of Ambuja Cement India Ltd and is now CEO of Ican Investment Advisors Ltd, the Indian advisory arm of Swiss asset management firm Notz Stucki. “Futures market is for commodities that see volatility in pricing every day. Cement prices don’t fluctuate every day. It has remained stable for the last few months.” Singhvi says he does not expect cement prices to change beyond 5-10% in the near future.
Says Sanjeev Bafna, joint president and deputy CFO of Grasim Industries Ltd: “Futures trading involves speculation. Cement, a bulky and perishable commodity, is usually sold through retail channels. We need to see how it works and what’s the government policy on this.”
Some industry analysts, however, welcome the prospects of cement futures. “The futures trading in cement could see some stability in cement prices. The cement from surplus region could come to cement deficit regions, which could balance the cement prices,” says Rupesh Sankhe, an analyst tracking the commodity for ICICI Direct.
NCDEX, however, says that future contracts will help cement consumers.
“Assuming that a builder needs two lakh tonnes of cement per month at a prevailing market price of Rs250 for a 50kg bag, it does not make sense for him to buy his entire requirement at one go as cement is perishable,” says the exchange official. “By entering into a futures contract for cement, he can lock the price of cement. This is a natural hedge against the volatility in cement prices,” he adds.