Petro, Non-ferrous Metal Firms Wake Up To Benefits

Mumbai, October 27: | Updated: Oct 28 2002, 05:30am hrs
Hedging through commodity futures trading is vital for any company engaged in commodity business. However, only a select few of some top Indian companies have woken up to the importance of hedging their risks. These are in the petroleum and non-ferrous and precious metals like Reliance Industries, Indian Oil Corporation (IOC), Sterlite Industries, Indo Gulf. Parekh Platinum (which has recently sought the permission from the Reserve Bank of India (RBI) to hedge its platinum requirements on the international exchanges.

On the other hand a large number of corporates engaged in agri business and cotton and manmade fibres and textiles business like Hindustan Lever Ltd (HLL); Nestle; Britannia, Parle, Hindustan Spinning, Century Textiles, Indian Rayon and others do not seem to have their hedging systems in place.

Executives from most of these companies having their hedging systems were not forthcoming to share the details and/or experience from hedging their positions both imports and exports. But they all agree on two main points: One, if there is no hedging activity, the company would not be in business at all, since the price risks may even wipe off the companys profits altogether.

Two, hedging mechanism is a must for any commodity-related business, more so with heavy import and components. Its absence would be more disastrous for the company and its stakeholders.

In the case of RIL, its 25-member hedging team in Mumbai is said to be busy hedging at least 30 per cent of the companys crude oil requirement on the International Petroleum Exchange (IPE) and the Singapores Simex and New York Mercantile Exchange (NYMEX) among others. Its treasury operations take care of the fluctuations in the currency market while the companys hedging desks main responsibility is to help the company achieve better margins from all its operations crudeoil imports, exports of petroproducts, margins and even shipping.

Sterlite Industries, which imports almost 50 per cent of its total raw material requirements, has set up its hedging desk in Tuticorin and also has an office in London both of which help the company hedge its copper and copper concentrate requirements on the London Metal Exchange (LME).

Indo Gulf, importing almost 80 per cent of its raw material requirements, has its desk in Gujarat.

One of the major reasons for the companies not to have their hedging system in place is that they operate in the relatively protected domestic market. Two, the thriving parallel markets where agri commodity futures are traded heavily right under the nose of the Forward Markets Commission (FMC) do not make hedging on commodity markets a viable proposition.

Further, even when the government in 1998 finally decided to open the hedging mechanism bolted since early 60s to meet the socialistic fervour of the times the agri commodity futures have not taken off. There has been migration of expertise and persons to the other markets like stock markets during the three-decades absence of agri commodity futures trading.

Also, this period saw agri commodity futures go underground where the illegal parallel markets have thrived, thanks to the absence of regulatory mechanism

Lastly, the absence also had the tax authorities neglect the demands of the players who feel commodity futures trading to be considered as business activity and therefore, want losses in this activity to be set off against the profits of normal business.

The proposal has been pending with the government since more than past two years.