SEBI may shun LME for base metal price discovery

PALAK SHAH | | Updated on: Nov 07, 2018
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Regulator mulls moving towards delivery-based contracts

The London Metal Exchange (LME) could soon be de-linked from India’s commodity markets. For nearly two decades now, MCX, which has a monopoly in trading base metals, has been following LME prices for settlement of its metal futures contracts. SEBI is now mulling over making these contracts delivery-based and linking them to Indian base metal prices.

The change of stance in settlement, and entry of the National Stock Exchange and the BSE, may make trading in base metals highly competitive, brokers dealing in the contracts told BusinessLine .

There is a view that domestic corporate houses and metals and mining traders will be able to play if contracts are linked to Indian metal prices. Also, the entire domestic trade could move to the exchange platform if contracts are made delivery-based.

Attracting corporates

The copper, lead, zinc and aluminium would attract many more corporate participants and other actual users looking to hedge themselves, said dealers. Tata Steel, Vedanta and Hindalco are among the top global companies exporting from India.

“Any severe movement in LME metal prices often has a drastic impact on Indian markets, irrespective of India’s demand-supply dynamic. LME attracts global speculators in droves and hence the wild price movement. It would be interesting to see how India’s moving away from this plays out. But it will surely attract corporates for hedging and take away the currency risk too,” said a leading commodity market broker in Mumbai.

Currently, gold and silver futures are the two contracts on MCX that are settled using Indian prices. Crude oil, another heavily traded contract on the exchange, is settled based on the US price.

At the end of 2014, former Forward Markets Commission Chairman Ramesh Abhishek had directed commodity exchanges to work on making metal contracts delivery- based to increase hedging volumes but this was put on the backburner by the exchanges as the regulator was being merged with SEBI.

Exchanges will now have to strengthen their warehousing capacity if give-and-take of delivery in metals has to happen via their platform.

The turnover of base metal trading on MCX stood at ₹6.93 lakh crore in the September quarter, up 28 per cent from the previous quarter.

Published on November 07, 2018

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