The Commodity Conclave 2019 promoted by MCX in association with BusinessLine , held in Chennai on March 12, deliberated on benefits of hedging for corporates and also dealt at length on the exchange’s compulsory deliverable contracts in aluminium and zinc.

S Muralishankar, Managing Director, Super Auto Forge, who delivered the keynote address, said, “hedging will help domestic auto-component makers mitigate commodity price risk and get quality supply.”

Chittaranjan Rege, Head-Base Metals, MCX, said even the least volatile base metal like aluminium had a volatility rate of 26 per cent last year against the average 15-17 per cent. “It is pertinent for companies to have a insurance or a financial module to mitigate risks arising out of such volatility,” he added.

In the panel discussion titled, ‘Metal contracts at India-discovered price — the advantage for users’, R Krishnan, Vice-President-Materials, Aquasub, acknowledged that the delivery option in metal contracts can help small businesses have an assured supply.

“Sterlite closure had a huge impact on Tier-2 and -3 companies with many of the suppliers tweaking the contracts, withholding delivery and even altering the standardised output quality. If there is option to take delivery through the exchange, it should help SMEs...”

VA George, Managing Director, Thejo Engineering, while admitting to problems faced by SMEs in sourcing metals from the open market, questioned Rege on how the exchange will handle delivery defaults. Rege replied, “If there is a default by the seller and he fails to fulfil his obligation, he will be charged a penalty. In addition, he will also be required to pay the replacement cost, i.e., the difference between the then spot market price of the commodity and the actual settlement price of the contract, to the buyer. MCX Clearing Corporation shall also take suitable penal/disciplinary action against any intentional/wilful delivery default.”

Ashish Bansal, MD, Pondy Oxides & Chemicals, raised the issue of warehouse rent which has to be borne by the owner of the e-receipt (warehouse receipt). To this, Rege replied, “the rent cost is part and parcel of the exchange ecosystem world over...”

Aravind M, a CPAI representative and a risk management expert, suggested that all corporates dealing in commodities should have a a comprehensive risk management policy. Selecting the right hedging instrument along with hedge accounting can reduce P&L volatility, he added.

The panel discussion was moderated by Rajalakshmi Nirmal, Deputy Editor, BusinessLine .

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