Commodity Analysis

Do you deal with base metals? Now buy/sell at India discovered price

Rajalakshmi Nirmal | Updated on November 28, 2019 Published on November 28, 2019

Metals, including aluminium, copper, zinc, nickel and lead, can be bought on MCX at a price that reflects domestic demand and supply

Till a few months ago, Indian businessmen manufacturing metal components sourced their raw material from manufacturers or traders in the domestic market and made payments based on LME prices. But that is not the case anymore. Metals, including aluminium, copper, zinc, nickel and lead, can be bought on the MCX – the Multi Commodity Exchange of India – platform at a price that is reflective of the demand and supply scenario in India, which at present is cheaper than the price quoted on LME.

Until now, SMEs were arm-twisted by manufacturers. While larger buyers got to buy the raw material at a discount, SMEs and MSMEs weren’t given that benefit. But now, all the buyers can buy at a uniform price on the exchange platform. This benefit of an India discovered price follows SEBI’s move in October last year that made it mandatory for all commodity derivative contracts to be settled through physical delivery (with the exception of crude oil and natural gas, as storage and transportation is difficult in these products).

While there was not much action in the initial few months of MCX’s base metals contracts becoming compulsorily deliverable (in March), it has picked up pace in last few months.

In end October, the exchange reported stock of 8,369 tonnes of aluminium, 5,400 tonnes of copper, 2,071 tonnes of zinc, 660 tonnes of lead and 47 tonnes of nickel. Users of base metals have shown an interest in MCX contracts. For the seller, while the exchange is a platform where he offloads excess inventory, for a buyer, it offers price advantage.

A comparison of the price charts of the spot price of metals (that is based on LME prices) and that of the near month contract of the metals on MCX, shows a diverging trend. Sample this: In aluminium, while the spot market price (based on LME price) is Rs 138.60/kg, the exchange price of the near month contract is Rs 130.20/kg. Similarly in copper, while the spot price is Rs 450.50/kg now, the near month futures contract price is Rs 431.35/kg.

Here, a look into features of the base metals contract in MCX and how they work:

Features of the contract

We take the example of copper, which became a deliverable contract on MCX beginning July 2019, to explain how the base metal futures contract at MCX works. All the base metal contracts on MCX are now monthly contracts and all outstanding long and short positions get marked for delivery at the expiry of the contract. The expiry of the contract remains the last working day of the month. If we take the November Copper contract, the expiry is on November 29. Trading in the contract will end on November 29 at 5 pm (earlier, it was 5.30/6.30 pm).

The last five days of the contract is called the tender period (TP). If you keep your position open in this period, for every day of open position, you will be charged an incremental margin of 5 per cent (of the contract value). This will be in addition to the initial margin and the additional/special margin, if any. Once the buyer of the contract settles his total due on the contract, the TP margin collected is refunded.

A seller of a contract on the exchange platform, too, has to cough up the TP margin. But if he makes an early pay-in of the commodity, he can avoid paying the margin, though the mark-to-market margin has to be paid. There is only one delivery centre for aluminium, zinc, copper and nickel, which is Thane, Maharashtra, but for lead it is at Chennai and Thane. The normal pay-in for commodities and funds is 12 pm on E+1 (one day after expiry). But goods need to be brought to the warehouse at least two days prior to the expiry of the contract to finish the formalities.

Pay-out for commodities and funds happens on E+1 at 2 pm. Warehouse, insurance and transportation charges on metals will have to be borne by the seller up to commodity pay-out date and borne by the buyer after commodity pay-out.

How it works

For a producer/trader who has a ‘sell’ position

    A trader who has a ‘sell’ position on the copper contract on MCX has to deliver the commodity to the exchange warehouse in Thane, Maharashtra. Copper should be of the quality specified under the contract — Grade A copper cathodes — accompanied by the necessary documents (note that only LME approved brands will be accepted, that include – Bharat Aluminium, Hindalco Industries, National Aluminium and Vedanta). Delivery is accepted in multiples of 2,500 kg. The cathodes should carry the producer’s sticker, reflecting the producer’s name, net weight, batch no, purity, number of pieces of cathodes in the bundle and date of manufacturing.

      As a seller, you can do delivery pay-in only through a ComRIS (Commodity Receipts Information System) account where your physical stock in the warehouse gets converted into e-receipts. ComRIS is a web portal operated by the MCX Clearing Corporation that maintains electronic records of commodities deposited at the exchange’s warehouse and gives real-time information on the movement of commodities from the warehouse.

      To open a ComRIS account, you need to approach one of the ComRIS participants (commodity brokers), information on whom you can find on the exchange website. Once the account is opened, you can log in with your credentials and express the desire to deposit goods to the warehouse service provider (WSP). After this, the WSP will get back to you and you can give the preferred date and time of delivery of goods. Once the WSP confirms the date and time, you can take the goods to the warehouse. At the warehouse, after the necessary documentation, the WSP will accept your commodity, and an electronic warehouse receipt will be issued. This will reflect on your ComRIS account.

      For a trader who has a ‘buy’ position

      The buyer of a contract will also require a ComRIS account. It can be at opened any time; not necessarily at the time of delivery. The two things the buyer has to note is that he will be required to pay GST in addition to the Final Settlement Price when he takes delivery of the commodity, and, post-delivery, it becomes the responsibility of the buyer to take the commodity from the exchange’s warehouse to his plant.

        Long way to go

        While this is a good beginning, MCX still has a long way to go. Delivery volumes have to improve further for prices to track the demand-supply situation in the domestic market more closely and the exchange to claim a position akin to LME in India, where the exchange’s stock can become a good indicator of the mood in the economy. And, to get there, greater awareness about the contract has to be created. Further, the exchange has to also look at rationalising levies and increasing delivery centres.

          Published on November 28, 2019
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