Commodities are going to be a critical driver of India’s economic growth in the next two decades; and futures trading in agriculture, metals and energy products holds humungous potential. The National Commodity and Derivatives Exchange (NCDEX), set up in 2003, has emerged as the country’s largest agri-commodity bourse.
Samir Shah recently took charge as its MD & CEO at a time when the commodity space has turned somewhat murky with the ongoing payment crisis at one of the spot exchanges and market participants have become wary. He shared his vision and challenges with Business Line.
Excerpts from the interview:
You have taken over at a time when trade volumes are not growing and confidence in the market has taken a beating. What are your priorities, and plans to achieve them?
The launch of commodity futures trading in India 10 years ago paved the way for a quiet revolution in agricultural marketing in the country. NCDEX has been at the forefront of this revolution, offering an efficient price discovery mechanism and bringing innovation and efficiency in prevailing trade practices.
Setting the pace for the next decade, there are three priority areas for us. The first is deepening and widening the participation in commodity markets. Second, making it easier for stakeholders — farmers, traders, investors — to participate.
Finally, improving and upgrading support services such as warehousing infrastructure, credit finance, and demat trading, all of which are integral to the holistic development of commodity markets. The FCRA amendment will bring a stronger regulatory environment as well as innovations such as options and indices.
NCDEX is associated mainly with agri commodities. There are policy and business risks associated with agri commodity prices and threat of delisting, suspension and so on.
We believe our basic purpose is to facilitate genuine price discovery within the Indian market as well as price risk management.
That is why we focus on commodities that are crucial to the Indian economy as well on increasing the participation of hedgers — those with genuine exposure to the underlying commodity such as producers, processors, industrial consumers, exporters, importers and traders.
Moreover, the sheer size of the agricultural market in India is so exciting. India produced crops worth Rs 9.23 lakh crore in 2012-13. Only a tiny fraction of this is currently being traded in the futures market.
So the headroom for growth in the agricultural segment itself is enormous.
We are now extending the same advantages of domestic price discovery and hedging to energy, metals and bullion, especially to small players.
There is one SME company in Raipur — Jay Ambey Metal Works — that, along with dozens of similar businesses, produces 60 per cent of India’s steel. Jay Ambey used to depend on local brokers and re-rolling mills to sell.
It also found it very taxing to ascertain the correct price of raw materials like sponge iron and melting scrap.
The business was held to ransom by suppliers as well as buyers. All this changed when we launched our steel contract in 2005.
Jay Ambey began hedging its price risk. Business soared. By re-launching our steel long contract, we look forward to once again helping hundreds of players like Jay Ambey flourish.
How do you propose to grow NCDEX’s agri and non-agri business in the next one or two years? Have you set any target?
We believe the best is yet to be. If international futures multiplier holds true for the domestic market, our annual maize trading volume will grow from the current 5.6 million tonnes to 190 mt.
In steel, where we are the benchmark, if we aggressively target an open interest of just around 0.5 per cent of the annual Indian steel long production of 30 mt, and assuming a daily trading volume to OI ratio of 50 per cent, we are looking at a potential of average daily traded quantity (ADTQ) of 75,000 tonnes in the next one year corresponding to 18.75 mt.
Our target is to have around one-third of our business come from metals, energy and bullion in the next couple of years. And we have a strategy in place to realise our goal. We have rationalised transaction charges for all members, resulting in savings by up to a third.
We are working on building a robust and complete portfolio to trade participants. We have recently re-launched the steel long contract based on BIS 2830 grade, encouraging the migration of the steel industry towards approved BIS norms.
Crude palm oil, re-launched with modified specifications, completes the oilseeds complex offering. We have submitted a proposal to FMC for launching a new gold contract focusing on price hedging as we feel delivery is not practical because of the curbs on imports.
What is your plan to resurrect market confidence and bring back growth in trading volumes?
We have undertaken many initiatives in the recent past such as strengthening warehousing infrastructure, introduction of COMTRACK®, our state-of-the-art warehousing accounting system, and rationalisation of the settlement procedure to provide customers the most comprehensive and cost-effective risk management solution in the Indian commodity market.
We remain the preferred platform for contracts in guar complex, along with all other agri commodities.
There is growing interest and participation in crude oil contracts. The market sees us as the most trusted pool of liquidity.
That is why our business in terms of volumes and OI has remained stable despite adverse market situation.
On the current regulatory oversight and suggestions for the regulator to grow/develop the market, I think the FMC has done a remarkable job in recent months to handle the NSEL crisis and at the same time initiate steps for market reform and market development.
We are enthused with FMC’s setting up of the Technology Advisory Committee and the Risk Management Group where a variety of far-reaching market reforms and market development initiatives are being discussed.
The commodity industry although 10 years old has a long way to go in terms of depth and liquidity, participation from foreign hedgers, banks and financial institutions, product innovation, commodity finance for farmers and warehouse development.
We look forward to working with the regulator towards significant development across all these fronts.