Corporate trading rises on commodity exchanges

Trading volumes on domestic commodity exchanges are rising with the entry of giant corporates from across all sectors, especially in global commodities such as base metals, precious metals, steel and energy.

Corporates contributed enormously to the volume and turnover growth in Indian commodity exchanges, which have together recorded a 41 per cent turnover growth at Rs 1,64,920.40 crore in the second fortnight of July compared with Rs 1,17,028.78 crore in the previous fortnight.

"Corporates form a big part of the physical markets, and as they start increasingly using the National Commodities and Derivatives Exchange (NCDEX) platform, the volumes will rise," said an NCDEX official.

An increase in corporate volumes would stabilise prices and help in anchoring the physical markets to the futures market, he said.

For effective price discovery, it was important for speculators, hedgers and arbitrageurs to be present in the market, the official added.

"The Multi Commodity Exchange (MCX) cloaks the maximum market share in metal futures in India, and traders would like to hedge on this platform where the cost is lower because of higher liquidity. Hence, the entry of corporates, especially for metals on the MCX, would help them in better price discovery," said Anjani Sinha, director, MCX.

Although, the volume of corporate hedgers has not reached a significant level, sources believe that within a short span of time it would overtake the volume of small hedgers.

In base metals, players like Binani Zinc (BZL) has been keen, hedging approximately 2000 tonnes of zinc on the MCX. However, the company does not have any plans to hedge on the NCDEX.

"Depending on the price movement, we put our products on forward contracts purely for hedging purposes, which is squared off towards the expiry of the contract," an official with Binani Zinc said, adding that the company's focus was not to trade on a daily basis but to hedge at an opportune time.

Reportedly, Binani Zinc, the second-largest zinc producer in the country after Hindustan Zinc, has traded to the value of Rs 1,500 crore and booked a profit of Rs 150 crore since it started hedging on the MCX last year.

Other players that are currently hedging on the domestic exchanges include Essar and Polycab Wire, while metal and energy majors, including Hindustan Copper (HCL), Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL), are in various stages of negotiations to begin hedging in the near future.

Many corporates hedge on global commodity exchanges, with metal majors trading primarily on the London Metal Exchange (LME) and the New York Mercantile Exchange (Nymex), and energy majors on the Intercontinental Exchange (ICE), among others.

"All hedging is incomplete if they are not done in both dollar and rupee terms," Sinha said. Commodity markets are meant for price discovery and price risk management. Corporates require both these to manage their businesses effectively. The entry of corporates in local commodity exchanges will help to balance speculation related to hedging.