Mumbai: Indian metal and energy firms are gradually turning to local commodity exchanges to hedge risks and take advantage of cheaper costs compared with international exchanges, industry experts said.
In April-December 2007, the share of copper and crude oil on the Multi Commodity Exchange of India (MCX), the sole platform for metals and energy trading in the country, nearly doubled to 17% and 16%, respectively, from a year ago. Currently, companies account for between 35% and 40% of the total trade on MCX, a senior official said.
“When a trader goes to international bourses, he runs two risks—commodity and currency,” said Gnanasekar Thiagarajan, director of Commtrendz Research. On local bourses, there is no currency risk as contracts are denominated in rupees, he said.
Essar Group, Ispat Industries Ltd, Hindustan Zinc Ltd, Binani Zinc Ltd and Meta Copper and Alloys Ltd are companies hedging risk in metals such as zinc and aluminium, domestically in small quantities now, company officials said.
“The beneficiary of this shift is naturally MCX, which controls most of metal, energy futures,” said Dharmesh Pandya, senior vice-president, Motilal Oswal Commodities Broker Pvt. Ltd.
MCX accounts for about 75% of the combined trade value on 24 Indian commodity bourses, while the agri-focussed National Commodity and Derivatives Exchange (NCDEX) accounts for 21%. Some corporates hedge soy and sugar in NCDEX, a senior official with the exchange said.
Hedging allows firms to lock in prices at the set levels by offsetting a physical position with an equal and opposite position in the futures market. However, with volumes yet to pick up in local exchanges, some of the bigger companies still prefer to go overseas for hedging.
“Essar is active on MCX for zinc. But, for commodities like copper, the exchange here cannot help as the requirement is huge,” said N.S. Param Sivam, head of forex and treasury at Essar Group, that has interests in steel, energy and shipping.
Lack of long-term contracts, with duration of more than one year, is another deterrent, officials said.