A significant development has been taking place in Indian metal markets with the launch of India-benchmarked MCX deliverable metal futures contracts.
By V Shunmugam & Ravi Bhushan
Metal markets today are convinced of the dependence of global metal prices on the health of China’s economy. China is the world’s biggest metal consumer with a third of global trade in manufactured goods (World Bank 2018). No wonder, metal markets keenly await the data on Chinese manufacturing and economy to appropriately price most metals. Such an influence is also backed by the existence of robust ecosystem.
In 1999, metal trading started on Shanghai Futures Exchange (ShFE), beginning with Copper and Aluminium. To match the mettle of London Metal Exchange (LME), ShFE began discovering prices that reflect the Chinese market fundamentals.
The success of ShFE derivatives market accelerated the practice of warranting in the physical market leading to healthy development of trade financing with the warranted inventory being used as the collateral. During the last decade, copper and aluminium inventory in ShFE warehouses have expanded by three times.
Development of ShFE-led warranting raised the bar of trust built around warehouse receipts.
State policies supported this development. China Nonferrous Metals Industrial Association (CNIA) emerged as the state-recognised nodal body for promoting compliance with national policies. Besides, the National Nonferrous Metals Standardisation Technical Committee periodically evaluates the need of revision in standards based upon the industry requirement in conformity with the global standards. The entry of international players for warehousing and warranting under ShFE framework indicates the steady integration of the global and Chinese standards.
With China being the world’s largest metals consumer, prices discovered on the ShFE platform are today a key indicator of the local fundamentals.
With its aim of being a ‘price-maker’ been achieved, ShFE is setting itself to compete with LME to be the global benchmark exchange. As per 2018 FIA annual report, ShFE traded 1,119 million tonnes of major non-ferrous metals, about a third of 3,932 million tonnes on LME. The proposed opening up of ShFE to foreign investors will further help Chinese market.
Indian metal markets are in the same state today as the Chinese were at the start of 21st century. The primary and secondary (scrap) Indian physical metal markets are in a highly unorganised and fragmented state amidst lack of quality standards and storage infrastructure with poorly developed forward curve. Despite being one of the largest consumers, Indian markets largely benchmark their deals on LME discovered prices.
Lack of development of regulated warehousing ecosystem for metals has not only crippled development market for financing of inventories but also restricted most major deals to a month’s horizon in an effort to lock their margins. As the first step towards development of regulated warehousing sector, primary and secondary (scrap) metal markets need synchronized standards
A significant development has been taking place in Indian metal markets with the launch of India-benchmarked MCX deliverable metal futures contracts. All five base metals futures contracts on MCX: Aluminium, Zinc, Lead, Nickel and Copper have recently been made delivery-based. The new deliverable contracts have been readily welcomed by the market participants and about 24,971 tonnes of base metals have been delivered through MCX’s delivery mechanism in the half year ending September 2019. In addition to this, an average daily Open Interest (signalling long-term interest) stood at around 80,000 MT in September 2019 and the current stocks of around 18,000 MT in the exchange-accredited warehouses. The India-benchmarked deliverable futures contracts have aided the transparent discovery of the India premiums. While, the product design of base metals still largely follows LME brands/standards, but it is expected to lead to the alignment of domestic standards.
If India’s metal futures markets were to recreate Shanghai’s success, it is essential that its price discovery process is backed by robustness of participation, financialisation of the metal markets ecosystem, standards and testing mechanism matching that of global markets, and the frequency/efficacy of relevant economic and market data collection and dissemination. It warrants that there is a policy unleash in India around standards and testing, financing of metal stocks, regulated warehousing and warranting, economic/market information collection and dissemination, etc.
The Bureau of Indian Standards, which prescribes standards, should provide for purity based standards for metals in alignment with global market needs, besides setting up sampling\testing protocol and accreditation for testing laboratories, matching international standards in an effort to connect the Indian markets with global counterparts. Further, bringing storage of metals under the Warehousing Development and Regulatory Authority will enable issuance of e-NWRs providing for the safety of financial institutions leading to development of forward curve across tenures. Allowing banks and financial institutions to finance such e-NWRs would not only ease the working capital needs of the user/producer industries but also make value chain develop storage to effectively cushion price fluctuations and thereby sustainably supporting the ‘Make in India’ policy aspirations. Healthy stocks and transparent information about the same will make markets further more efficient. Finally, existence of a nodal ministry for metals similar to that of steel with a mandated responsibility of the sustainable development of non-ferrous metals ecosystem will bring coherent policy actions aimed at making India a competitive manufacturing base for global consumers and to bring its share of global trade to 5%.
Shunmugam is head, Bhushan an analyst, Research, MCX, India. (Views are personal)