Opinion

Who killed the commodity markets?

RAJALAKSHMI NIRMAL | Updated on March 12, 2018

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As stock market traders log on to their terminals once again, hoping to turn a quick profit from the bull-run, commodities trading is not witnessing a similar ebullience. In fact, it’s on the wane. Turnover at the Indian commodity bourses was 28 per cent lower in 2013, from the past year. MCX, the largest commodity futures bourse which trades mainly in gold, silver and energy contracts, bore the brunt of this decline. Year 2014 has not been any better so far. Monthly turnover on MCX is now at just a third of what it used to be in 2013. Average monthly turnover in gold and silver contracts has more than halved. Volumes have also flatlined at NCDEX, which trades mainly in agri commodities.

The fall in trading volumes started with levy of CTT or Commodity Transaction Tax in July 2013. A CTT of 0.01 per cent on the sell side is applicable on all non-agri commodities including gold, silver, industrial metals and energy and a few agri commodities. This tax, like the securities transaction tax, reduces arbitrage profits, say traders. Even at 0.01 per cent of the contract value, the new tax has increased the cost of trading by 18-20 per cent.

Also to blame is the NSEL scam, which has shaken confidence in this asset class. It broke out in July last year after the Forward markets Commission found the spot exchange offering futures contracts allowing members to do paired trades on commodities such as raw wool, maize and castor seed. This investigation is still on with ₹5600 crore of investor money still locked up. Even long-term investors who had invested in spot gold and silver haven’t received settlements in full.

As always, global factors are at play too. A voracious appetite for commodities from China has for long been the lynchpin of global commodity markets and China’s slowing economy has undermined global commodity prices. For gold and silver, the loss of safe haven demand has meant a sharp reversal in prices. The price of gold on the MCX is down 13 per cent from a high of ₹33,146 per 10 grams in August last year to ₹28,750 now. Spot silver prices are down close to 30 per cent from last year’s highs.

These two contracts make up most of the country’s commodity futures trades. A reviving equity market may not help matters for commodities either.

Published on May 22, 2014

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