Commodity Analysis

Aluminium prices to be ‘Made in India’

V Shunmugam | Updated on February 17, 2019 Published on February 17, 2019

Earlier, Indian aluminium prices were discovered in global markets

At the start of 2019, the Multi Commodity Eexchange of India (MCX) launched the first domestically benchmarked aluminium futures contract in the country. Earlier, Indian aluminium prices, discovered in markets abroad, did not necessarily and sufficiently reflect the Indian fundamentals despite the country being self-sufficient in the metal. We had to accept the global prices and had no say in the price discovery process.

MCX March aluminium contract is a compulsory delivery contract and will be settled based on the polled domestic spot prices, against the earlier practice of following international prices. The spot prices are taken from domestic market participants representing different segments in the aluminium value chain and disseminated twice daily on the exchange website for the market participants to anchor price expectations around it.

Such a spot price will include LME (London Metal Exchange) prices in rupee terms adjusted for domestic market premium, freight, customs duty, warehouse cost and other charges, excluding GST.

The price will thus fully reflect the Indian market fundamentals. The effort to poll domestic prices from domestic stakeholders will help participants gauge the local prices and also bring transparency in the spot markets.

Aluminium is a cost-effective component in the power, manufacturing and automobile industries whose competitiveness is critical to India’s manufacturing sector. With India being the fastest-growing economy in the world and, 100 smart cities being developed to provide for efficient urbaniszation, competitive pricing of the metal and its risk management is a critical need. This is taken care of by this newly launched domestic benchmarked delivery-based contract.

Producers as well as users can make the best use of the MCX deliverable contracts and give/take delivery and thereby exploit pricing transparency.

The MCX deliverable aluminium contract is quoted in rupees, auguring well for absorption of currency risks along with commodity price volatility. It is best suited for producers, importers, exporters and consumers alike, to hedge their physical market exposures and stabilise their balance sheets, allowing them to plan their business expansion.

Annualised price volatility in 2018 in aluminium was at a massive 18 per cent amidst trade bans and environment-related issues. In such a condition, aluminium producers, manufacturers, stockists, exporters and processors who simply holds physical stocks, without protective hedges, will be taking an enormous risk.

The contract enables delivery of LME-approved brands of primary aluminium ingots with a minimum purity of 99.70 per cent and in multiples of 5MT, from MCX delivery centre located in Thane, Maharashtra.

The price quoted on the exchange is for delivery of the metal ex-warehouse. The average of the previous three days’ evening spot prices will be the price at which the delivery-based settlement of the contract will take place.

A participant who wants to give delivery can do so at any time during the contract’s life, with a benefit of exemption from all types of margins, except mark-to-market margins. The actual exchange of the metal and associated payments will be effected after the contract’s expiry and those interested in taking the metal out of the warehouse can follow the exchange-prescribed processes. The open interest in the contract has grown to about 2,100 MT in two weeks since its launch.

The writer is Head Research, MCX

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