MCX plans trading in ATF futures

Move to help airline companies hedge abroad, set fuel budgets.

The Multi Commodity Exchange, India's largest commodity futures trading platform, is planning to introduce trading in aviation turbine fuel (ATF). The comex has already applied to the Forward Market Commission (FMC) for clearance.

"We applied about two months ago with the proposal to the commodity market regulator and are awaiting the response," said Joseph Massey, deputy managing director.

He said the exchange was willing to launch all tangible and intangible commodities that have consumer demand.

According to an exchange official, plans are afoot to launch sulphur dioxide (SO2) futures as well, coinciding with carbon credits launched recently, to have the complete environmental protection package available for trade.

When asked about when ATF futures were expected to launch, Massey said, "It is in the preliminary stage now. As a matter of practice, one month after obtaining approval from the regulator, we promote the product and educate the existing and potential participants for trading on the platform."

"Contract details are yet to be worked on," he added.

In the absence of any benchmark reference prices domestically, ATF prices are negotiated between consumers (mainly airlines companies) and suppliers (petroleum companies or oil marketing companies.) Experts feel that a reference price on the domestic exchange will help negotiate prices better.

Besides, airline companies would also be able to hedge their risk on the basis of anticipated fuel demand for peak and non-peak seasons and thus control their fuel costs.

Currently, the cost of ATF supplied by state-run oil companies is based on global crude oil prices in the previous month.

"Also, there will be more transparency in the market and we will be able to trade directly with the oil companies. Apart from that, the fact that trading will be conducted in Indian currency will be a huge advantage," he added.

Due to the constant rise in crude oil prices, uncertainties regarding fuel pricing and complications in trading overseas, airlines are sceptical about hedging overseas.

"An airline would not want to be trapped in a high price situation via hedging," said Ramki Sundaram, CFO, Simplifly Deccan.

For instance, SpiceJet, which is looking at hedging abroad, is unwilling hedge more than 1-2 per cent of its total fuel procurement. "But once we get a domestic platform, the hedging will definitely increase," said a SpiceJet executive.

Currently, ATF accounts for more than 45 per cent of an airline's operating costs on an average. For example, Air-India's fuel budget for 2004-05 rose to Rs 2,100 crore from Rs 1,339.75 crore in 2003-04 thanks mainly to the increase in ATF prices.

With the launch ATF on domestic exchanges, airline companies would be able to set their fuelbudget. However, some analysts are keeping their fingers crossed on the success of ATF futures as the number of potencial participants is difficult to estimate.