Chapter 12: Understand Base Metals Derivatives Trading in India

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

*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.

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.

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.