Magazine

The Twin Engines Of Indian Futures


For years the Indian Tobacco Co., a $3 billion agribusiness conglomerate based in Calcutta, was frustrated. It didn't know from month to month how much it would get on the open market for the oilseeds and grain it sold, and there was no local commodities exchange allowing it to lock in future prices. To buy or sell futures contracts, ITC had to cross two oceans and work with the Chicago Board of Trade. Now, much to the relief of ITC and about 50 other companies, the problem is solved.

Two years ago government deregulation allowed two competing Indian exchanges, the National Commodity & Derivatives Exchange (NCDEX), which deals mostly with agricultural products, and the Multi Commodity Exchange (MCX), which mostly handles energy and metals, to open for business. The fully electronic exchanges now do a daily volume of $1.5 billion in futures contracts. And ITC, which is 30% owned by British American Tobacco (), is NCDEX'S biggest corporate customer, with annual trading volumes topping $300 million, far greater than $40 million per year it did on the CBOT. That has helped grow its business. "We used to buy one million tons of produce a year; now we buy two million," says ITC's chief of international business, S. Sivakumar.

Commodities traders say this is just the beginning. Trading volume could rise to $15 billion a day by 2012 as more companies sign up, estimates CLSA Asia-Pacific Markets. Volumes today are still just a fraction of those on major exchanges such as the New York Mercantile Exchange, or NYMEX, and the Tokyo Commodities Exchange, or TOCOM. But MCX has overtaken TOCOM as the No. 2 trader of silver after NYMEX. And analysts say it may not take long for India -- already the top producer, importer, and consumer of some 35 commodities -- to become a global hub. "Indian exchanges could become the largest in the world for some commodities," says Aniruddha Dange, head of research for CLSA in Bombay.

That would mark a big change from the situation just a couple of years ago, when archaic laws from India's socialist era controlled commodity prices. What's more, those prices were completely out of sync with global markets, making it nearly impossible to gauge domestic demand and supply efficiently. Farmers routinely overplanted and sold into gluts or underplanted and missed price spikes. The lack of certainty contributed to exploitation of farmers by layers of intermediaries, who kept up to 70% of the retail price of crops. And companies such as ITC were forced to hedge overseas -- even though foreign exchanges don't trade many popular Indian commodities such as cluster beans and gram.

PROBLEMS AHEAD?

The stage was set for change in 2002 when India lifted a ban on futures trading. It took until December, 2003, for India's twin commodities exchanges to get up and running, with help from the National Stock Exchange, which holds minority equity stakes in them. Both are private, for-profit enterprises, with MCX controlled by Bombay-based Financial Technologies Ltd. and NCDEX by private banks such as ICICI Ltd. and other investors. The advent of the exchanges is helping to build "a well-functioning, contemporary market structure in these commodities," says Nachiket Mor, executive director of ICICI ().

That market trades some 100 commodities daily, from lentils to steel. Both exchanges are already profitable, with combined revenues of $17 million and profits of $3.2 million. But growth may be stymied by a continuing government ban on spot commodities trades and trading in options. Another factor that may crimp future earnings: So far neither domestic mutual funds nor foreign institutional investors can play the futures market. Both MCX and NCDEX are lobbying hard with New Delhi to change that.

By Manjeet Kripalani


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