The National Commodity & Derivatives Exchange (NCDEX), India’s leading agricultural commodity derivatives exchange, plans to penetrate into market leader Multi Commodity Exchange’s (MCX)’s stronghold of metals derivatives. The plan is to launch two metals contracts, which will be delivery contracts and capture Indian prices. The bourse is also considering launching location-spread contracts for agri commodities, in a first in the country.
Samir Shah, managing director and chief executive officer, NCDEX, said, “We have always tried to diversify into non-agri but only in a differentiated manner. We have applied for two contracts, aluminium and nickel, to Sebi (Securities and Exchange Board of India).”
Both contracts will be under compulsory delivery, which will be for the first time in the metals derivatives segment. MCX metals contracts are cash-settled, and the settlement is done based on London Metal Exchange prices.
“Sebi is also aggressively moving towards promoting the delivery-based derivatives. We are rightly positioned in India as the only exchange with deep expertise in delivery. If we can handle agri, we can handle anything else, as agri is the most complex of all, with natural deterioration in quality, food standard etc,” he said.
Shah declined to discuss further details of the contract as regulatory approval was expected, but sources said the NCDEX had proposed to benchmark domestic prices of these two metals based on prices taken from the Free Trade & Warehousing Zones (FTWZs) set up by Arshiya Limited and situated near Panvel on the outskirts of Mumbai.
The idea to price these metals on the landed cost after imports was that in India, the prices of metals don’t exactly match with LME prices, and huge premium discount prevails depending upon domestic supply demand. Premiums range between 5 and 30 per cent on the landed cost. Several small and medium units using metals as raw material can have a proper hedging cost based on domestic prices. India’s 98 per cent of nickel requirement is met by imports, estimated at 50,000 tonnes. Domestic aluminium production is aound 2 million tonnes (mt). Aluminium and its scrap is consumed in electrical (wire and cable) and transport (auto components).
The NCDEX, which plans to also launch location-spread contracts for agri commodities, currently has more than one delivery centre for most agri commodities. In many cases, buyers refrain from opting for delivery despite needing it because they are not sure from which centre they would get delivery.
The price of the commodity for which the buyer is getting delivery is adjusted considering freight by deciding premium discount for different centres, but location spread contracts will decide this premium discount.
For example, soybean has delivery centres in Indore and Akola. Location spread contracts will trade the difference of price in these two centres and also attract arbitragers. “This will attract buyers and premium discount depending upon where the seller is giving delivery. The NCDEX wants to balance sellers’ need of more delivery centres, while buyers wish for less number of delivery centres,” a source said.