MCX volumes to double on metal, energy contracts

Volumes at Multi Commodity Exchange (MCX) will grow almost 50 percent in the year to March 2012, propelled by small-sized metal contracts instead of farm commodities prone to government intervention, the exchange’s top official said on Friday.

Even though India is among the world’s biggest producers and consumers of agricultural commodities, it is MCX’s silver mini and gold contracts that figure among the top ten metal contracts globally, according to the Futures Industry Association.

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The government has in the past banned agricultural commodities futures on inflation fears, and later re-listed a few.

Rice and some pulses are yet to be re-listed.

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“We have been intensifying our push towards mini contracts,” said Lamon Rutten, managing director and chief executive of MCX.

MCX, majority owned by Financial Technologies (India) Ltd and which accounts for about 80 percent of Indian commodity futures trade, registered a turnover of Rs 984000 crore ($2 trillion) in the last fiscal year.

Volumes of silver mini contracts jumped 45 percent to 124,883 tonnes in that period, and volumes clocked in the six months to September have already topped last year’s volumes.

MCX sees a daily turnover of Rs 60,000 crore ($12.2 billion).

“If we look at the growth curve, it has been a very steady quarter on quarter on strong underlying reasons…brokers are continuing to expand their network and that will presumably see results,” said Rutten.

NEW BILL IS KEY

Rutten said the exchange’s current focus was metals and energy contracts.

“The philosophy on agricultural contracts is long term… we are really careful, it is an agricultural commodity and when we believe the product is insulated from negative government intervention and when we can handle delivery issues, that’s when we will move,” Rutten said.

“The government is not driven by facts, but driven by public perception. There have been a lot of studies that showed futures markets don’t lead physical markets, there’s no objective reason for government to intervene in our markets but it didn’t stop the government in the past.”

Politicians worry that unbridled futures speculation will drive up food prices, particularly as double-digit inflation has proven resistant to the central bank’s efforts to rein it in with 13 rate hikes since March 2010.

Such fears have meant a bill to strengthen market oversight, free up entry of financial institutions and the launch of new products has been delayed in parliament since 2005, preventing more dramatic growth for a market whose annual turnover more than quintupled to $2.5 trillion since futures trading started in 2003.

Rutten said if the government did not pass the act soon then India could lose its price maker position to China, which could open its commodities trade to foreigners faster.

“The international competitive angle is really not properly understood, the Chinese have a very strategic approach to exchanges. They are gradually opening them up and making them global price setters,” he said.

The effects of delays in allowing foreign players are showing on trade of commodities such as iron ore, of which India is a key global supplier.

“If we look from the buyer’s perspective, typically the component of freight cost is more important than the component of iron ore cost for steel makers. We are not permitted to offer freight futures,” said Rutten.

“We have an iron ore contract, but it really is very imperfect because you allow people to manage a smaller part of their risk and you tell them to continue running the big risk and this is not a good value proposition.”