Mumbai, May 2: The National Commodities and Derivatives Exchange (NCDEX) is wooing old-economy firms to hedge against price swings in commodities, which account for almost 60 per cent of their costs.
The effort is already paying off with some textile makers considering taking a cover for cotton, an input that makes up a large portion of their raw material expenses.
NCDEX managing director P. H. Ravikumar believes that the exchange will one day become bigger than stock exchanges similar to foreign commodity bourses which are two to three times bigger than exchanges in the US and other developed markets.
In its three-to-four-month existence, the exchange is registering transactions worth Rs 120 crore a day.
On a single day, the National Stock Exchange (NSE) clocks a turnover of around Rs 5,000 crore.
NCDEX is promoted by NSE, ICICI Bank, Nabard, Life Insurance Corporation (LIC), Crisil and Punjab National Bank (PNB). Ravikumar said the process of generating awareness among companies has already begun. “Liquidity begets liquidity. The trigger will come when we trade Rs 500 crore on a single day. That’s the point of inflection,” he says.
Exchanges like NCDEX have seen awareness levels at a dismal low. “We analyse balancesheets and then inform corporate bigwigs how they could benefit from our platform.”
Companies are well versed in hedging risks involving foreign exchange and interest rates. But the same firms do little to contain their exposure in commodities in raw material costs or finished goods.
“A battery manufacturer recently came to us lamenting that the runaway costs of zinc has seen his six-monthly profit forecast of Rs 3 crore vanishing. Had he hedged his exposure with us, he would have saved himself from this predicament,” Ravikumar said. Profit margins can be locked into and an erosion of profits can be avoided as commodity prices gyrate.
Thus a steel maker can hedge his position vis-à-vis his requirement for iron ore, while an auto manufacturer could hedge its position on steel prices. “We are there to disseminate future prices for any commodity. It can even be jewellery exports, as gold and silver have been violently fluctuating at recent times,” Ravikumar said. NCDEX is also looking at energy futures, where it is in talks with Power Trading, “though it’s too preliminary to write about”, he added.
“We need to bring about a great degree of sensitivity. The Securities and Exchange Board of India and the securities market have evolved over a number of years. We have just got started,” he said.
For national commodity exchanges like NCDEX, they realise that a fair bit of “hand-holding” of companies and investors are required and they are gearing up to it.
For the record, there are 19 regional commodity exchanges already in the fray. Exchanges like NCDEX and two others of its kind plan to put in place a superior technology platform. “They (regional exchanges) have to change their business model and become more transparent,” Ravikumar said.
NCDEX is open till 11.30 pm to track the last whiff of action in foreign commodity exchanges in Chicago and New York.
“Eventually, we plan to keep the exchange live for 23 hours,” Ravikumar said as commodity prices in India cannot be insulated from that of the rest of the world.
While small investors are still wary of trading in commodity exchanges, Ravikumar said awareness campaigns and “word-of-mouth publicity” will help them get more small investors into the fold.
NCDEX already has a tie-up with NSDL, the leading depository for demat accounts. It is close to signing up with CDSL, the other leading depository for a similar tie-up.