Commodity exchanges ride high on volumes

MCX specialises in bullion, NCDEX in farm goods and NMCE in plantation produce.

The Multi-Commodity Exchange (MCX) has clocked the highest turnover among the three national multi-commodity exchanges during April-June 2004.

The other two exchanges are the National Commodities and Derivatives Exchange of India (NCDEX) and the National Multi-Commodity Exchange (NMCE). However, the NCDEX has registered the highest growth rate at 192 per cent.

Out of the three de-mutualised electronic multi-commodity exchanges, the NMCE was the first off the block, in November 2002. The MCX and NCDEX began their operations in November-December 2003.

Since their operations have largely stabilised, the April-June 2004 quarter provides an appropriate platform for comparison.

The MCX and NCDEX have 275 and 318 active members, respectively. Of the NMCE's 110 members, 50 are active. While NMCE's turnover has dipped for the previous quarter, the turnover of the MCX and NCDEX have tripled.

The NCDEX's Chief Business Officer, Narendra Gupta, attributes the growth in turnover to a rising awareness of the benefits of hedging among traders.

Turnover data reported by the exchanges also suggest that they are developing their areas of specialisation. The MCX derives 80 per cent of its turnover from trading in bullion contracts.

At the NCDEX, 65 per cent of the turnover comes from agricultural commodities, especially channa (chick peas), guar seed (cluster beans) and wheat. Bullion accounts for the remaining 35 per cent.

Nearly 92 per cent of the NMCE's turnover comes from agricultural commodities, with plantation products like rubber, pepper and cardamom the major contributors.

According to Satish Menon, chief operating officer, Geojit Financial Services, a leading player in the commodity futures brokerage business, the reason for the MCX's high turnover can be bullion. The bullion trade in India is well spread and more lucrative than that in agricultural commodities.

"Depth creates volume and vice-versa. the MCX has strategic tie-ups with premier associations like the Bombay Bullion Association. This ensures that genuine players in the bullion trade participate in it. So the volume has automatically increased," he says.

So, is revenue the only yardstick to gauge the success of an exchange? Not entirely. An NMCE source says, "In the initial stages, exchanges promote the participation of market makers to bring in liquidity, which boosts the volume. Once the participation becomes direct, the volume stabilises."

Brokers, too, appraise a number of factors before playing in the market. Manish Shah, head of retail products at Motilal Oswal Securities, which also deals in commodities, argues that while volume and open interest are important indicators, the operating systems in place are vital.

"Infrastructure, delivery mechanism and trade guarantee funds are significant for gauging the performance," he says.

The NCDEX has the largest settlement guarantee fund with a corpus of over Rs 100 crore. Its members have to pay a refundable deposit of Rs 30 lakh as a buffer against default. To ensure smooth physical delivery and better linkages, the exchanges are tying up with warehouses.

The MCX's Deputy Managing Director, Joseph Massey, says the volume in commodity futures trade is coming from metros, followed by commercially important cities in states where particular commodities are produced in bulk.

"Since the commodity futures market is developing, participation is obviously more where awareness is high," he says. According to him, the participation of banks in the commodities trading business will impart a greater depth to the market since they have large distribution networks.

The three exchanges together posted a turnover of Rs 27,500 crore in the first quarter of the current year, almost 35 per cent of the total turnover in commodity futures, including the volume logged at the other 22 single-commodity exchanges, of Rs 81,466 crore reported by the Forward Markets Commission (FMC).

The commission's chairman, Kewal Ram, reckons the total turnover in the commodity futures markets will grow almost 40 per cent this financial year to nearly Rs 1,80,000 crore.

Exchange executives say the action is just beginning, and as in many countries, the Indian commodity market is set to outgrow the equity markets.

The exchanges are launching a slew of new products, both agricultural commodities like rice, cash crops, pulses, and other niche items like guar gum as well as industrial commodities like energy products, and indices. The NCDEX also plans to launch weather derivatives for farmers.

The MCX launched the world's first steel contract in February, though that had not quite taken off. About 500 tonnes of steel futures, on average, are being traded on the exchange.

"The lack of awareness is an important factor impeding trade steel futures," says Massey. The exchange is also trying to rope in steel companies to use the exchange as a trading platform.

"More awareness is required at the grassroots. Being a farm-based country, India has a huge opportunity in the futures trade. The lack of proper awareness is holding back trade," concludes Kailash Gupta, managing director, NMCE.