Finance firms eager for commodity options trade
Indian finance service firms hope the embattled government has enough reform zeal to pass a bill to allow commodity options trade, enabling them to offer more tools to hedge exposure to raw material costs.
January 19, 2011 / 17:12 IST
Indian finance service firms hope the embattled government has enough reform zeal to pass a bill to allow commodity options trade, enabling them to offer more tools to hedge exposure to raw material costs.
Multi-national firms like PepsiCo Inc and Coca-Cola Co are major buyers of sugar in India and also close trackers of exchange rates and other costs like freight that can be indexed. Domestic sugar buyers like ice cream and sweets maker Kwality Dairy Ltd are also keen to hedge costs.But all are currently limited to forward delivery contracts, which leave users exposed should prices move sharply against them.Options could be traded on Indian commodity bourses this year if parliament overcomes flak from critics about its economic record on prices in the upcoming budget session in February and gives regulator the Forward Markets Commission (FMC) authority to make the rule change."If options come on board, we can avoid taking naked positions, and entice the hedging community to use better tools to manage price risk," said Somnath Dey, vice-president of research with Religare Commodities, which hedges for clients dealing in base metal like copper, lead and aluminium."We are ready with products for options for our hedgers, as we already have currency options in place."Companies that import and export commodities are allowed by the Reserve Bank of India to hedge price risk on international exchanges. But major buyers of commodities would prefer to hedge all their risks -- the price of raw materials, foreign exchange rates and freight rates -- in one place. This would also save on the overall cost of hedging, which rises if firms need to pay fees to several exchanges.Growing businessIndia commodity bourse turnover rose by 50% to Rs 82.70 lakh crore (USD 1.83 trillion) in the first nine months of the fiscal year ending in March 2011, FMC data shows, but still lags the major trading centres.Turnover is just 5% of the turnover of China's commodity exchanges -- which restrict the participation of foreign companies and also do not offer options -- and less than half a percent of US futures trade."New options contracts will benefit all participants of trade and increase liquidity and help in the development of the commodity market," BC Khatua, chairman of the FMC, told Reuters.India's five national commodity bourses - National Commodity and Derivatives Exchange, Multi-Commodity Exchange, National Multi-Commodity Exchange, the Indian Commodity Exchange (ICEX), and the ACE Derivatives and Commodity Exchange account for the bulk of the trade in the country, the world's biggest gold buyer, biggest sugar consumer and producer and No. 1 palm oil importer.Options could also attract foreign investment and help India become an Asian commodities trading hub in products like palm, now dominated by the Bursa Malaysia Derivatives exchange or soyoil , now dominated by China's Dalian Commodity Exchange ."We'll have to slowly move from being the price taker to price maker to attract foreign participants for hedging in our market and we are moving towards this," said Chiragra Chakrabarty, director-financial of advisory firm Deloitte in India.Heavy handGovernments have placed a heavy hand on some commodities trade since it began in 2002, banning forward sugar contracts from November 2009 to December 2010 as prices reached a record high Rs 3,555 a tonne after scant monsoon rains hit the cane crop and sparked a sharp rise in overall food prices.The current Congress-Party led government too has moved cautiously on commodity market reforms in the face of soaring food inflation.But Indian farmers received ample summer monsoon rains in 2010, raising hopes for lower food prices and allowing the country to resume sugar exports after a year of imports which lifted London and New York sugar prices to the highest in 30 years.Such price and output swings make options a natural for India, an exchange executive said."The commodity derivatives market is mature enough for such new products, especially in internationally liquid commodities like gold, silver, copper and crude oil," said Sanjay Chandel, CEO of ICEX."We are ready to accept new value added products such as freight, indices and warehouse receipts." Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
