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Chapter 12: Base Metals Derivatives Trading in India

10 Mins 25 Sep 2022 0 COMMENT

As a stock market trader, you may have invested in metal companies such as Hindustan Zinc, Hindustan Copper, Balco, Nalco, Vedanta, etc. The share prices of these companies are largely dependent on price action in respective commodities. India is one of the largest users of base metals because of its industrial expansion, infrastructure growth, and increasing population. Derivatives trading of base metals is gaining traction amongst commodity traders because of its international linkages, liquidity and the leverage it offers to investors. In this chapter, we will understand all about metals derivatives trading in India.

Futures trading in base metals was started in India with the inception of a nationalised commodity exchange in 2004. Multi Commodity Exchange (MCX) of India is the leader in trading of base metals derivatives. Futures trading of base metals was initially introduced as cash settled contracts in the absence of identification of major physical delivery centers in India. These contracts were replicas of their global benchmarks i.e., London Metal Exchange (LME) but in smaller contract sizes.

After taking over control of the commodity derivative market, SEBI has modified contract specifications for base metals from cash settled to deliverable contracts. With this change, Indian manufacturers and consumers are able to exchange goods through an exchange platform in a more efficient and transparent way.

At present, five base metals are available for trading at MCX and these are aluminium, copper, lead, nickel and zinc.

Futures contract specifications

 

Aluminium

Copper

Lead

Nickel

Zinc

Contract size

5 MT

2.5 MT

5 MT

1.5 MT

5 MT

Quotation base

Per kg

Per kg

Per kg

Per kg

Per kg

Delivery unit

5 MT

2.5 MT

5 MT

1.5 MT

5 MT

Delivery logic

Compulsory, if the contract is open on the expiry day

Expiry date

Last day of calendar month

Initial margin*

Minimum 8% or based on SPAN, whichever is higher

Extreme loss margin

Minimum 1%

*Initial margin may vary subject to exchange requirement and guidelines.

Options contract specifications

After taking over regulation of the commodity market from FMC, SEBI had allowed Options trading in commodity with Futures as an underlying. Accordingly, Options trading was started in copper and zinc. Later, the same was introduced for nickel.

Parameters

Copper

Nickel

Zinc

Underlying

MCX Copper Futures Contract

MCX Nickel Futures Contract

MCX Zinc Futures Contract

Expiry day

(Last trading day)

8 business days prior to expiry of underlying

Underlying quotation / Base value

Rs./kg

Rs./kg

Rs./kg

Underlying price quote

Ex-warehouse Thane

Ex-warehouse Thane

Ex-warehouse Thane

Strikes

7 In-the-Money (ITM), 1 At-the-Money (ATM) and 7 Out-of-the-Money (OTM) strike prices

7 In-the-Money (ITM), 1 At- the-Money (ATM) and 7 Out-of-the-Money (OTM) strike prices

7 In-the-Money (ITM), 1 At-the-Money (ATM) and 7 Out-of-the-Money (OTM) strike prices

Strike price intervals

Rs. 5.00

Rs. 20.00

Rs. 2.50

Tick size

(Minimum price movement)

Rs. 0.01

Rs. 0.05

Rs. 0.01

Daily price limit

The upper & lower price band shall be determined based on a statistical method using Black Scholes Option pricing model and relaxed considering the movement in the underlying Futures contract.

Settlement

Same as that of Options on other commodity Futures

Contract specifications of METLDEX

Commodity index based on base metals Futures (METLDEX) was another product added to the Indian commodity derivatives market. METLDEX—a sectoral base metals index—was launched in Aug 2020.

Parameters

Description

Underlying

MCX iCOMDEX BASE METAL

Expiry day

(Last trading day)

One business day prior to the start of rollover period in the underlying constituent/(s) index.

Underlying quotation/Base value

Index points

Tick size

(Minimum Price Movement)

Rs. 1

Trading unit

Rs. 50 * MCX iCOMDEX Base Metal Index

Daily price limit

The base price limit will be 3%. Whenever the base daily price limit is breached, relaxation will be allowed up to 6% without any cooling off period in the trade. In case the daily price limit of 6% is also breached, then, after a cooling off period of 15 minutes, the daily price limit will be relaxed up to 9%.

Settlement

Cash settlement

Factors affecting metal prices

  1. Metal prices in India are determined by domestic and international spot market values, as well as freight rates, custom charges, trade agreements, and the USD-INR exchange rate.
  2. Metal prices are affected by economic factors such as industrial expansion, recession, and inflation.
  3. Construction of new production facilities or processes, new uses or discontinuance of historical usage, and unexpected mine or plant closures (natural disaster, supply disruption, etc.) are all examples of commodity-specific occurrences.
  4. Government-imposed trade policies (the imposition or suspension of taxes, penalties, and quotas) have an impact on supply since they regulate (restrict or encourage) material flow.
  5. Armed warfare and geopolitical events involving governments or economic systems can result in substantial upheavals.
  6. Metal demand rises as civilisations develop, based on their existing economic situation, which is also known as the national economic growth factor.

Summary

  • India is the one of the world’s largest consumers of base metals in various forms and their demand is increasing due to increased industrialisation, population growth and infrastructure growth.
  • Base metals derivatives provide ample opportunities for Indian investors to trade in metals through index, Futures and Options.
  • Base metals Options trading is available on copper, zinc and nickel as on July, 2022.
  • Base metals have multi-faceted usage such as in household items, industrial components, infrastructure, and pharmaceuticals, which contributes to growth of economies.

In the next chapter, you will be introduced to one more commodity segment i.e., agri commodities.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The securities quoted are exemplary and are not recommendatory. Such representations are not indicative of future results. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.