Commodity street faces tough times

Trading volumes in commodity exchanges have declined in Q1FY08

The commodity futures market has started losing its sheen after a stupendous growth rate of 96.05 per cent in the last financial year. Trading volumes in the new-age commodity exchanges have declined in the first quarter of the current financial year.

Commodity experts blame the government for the poor show. The trading ban on certain commodities and the delay in moving the Bill to give more powers to the regulator – the Forward Markets Commission – are the main hurdles, they said.

In April-June 2007, the total turnover of the three exchanges – the Multi Commodity Exchange of India (MCX), the National Commodities and Derivatives Exchange (NCDX) and the National Multi Commodity Exchange (NMCE) - has fallen by 11.12 per cent compared with the first quarter of the previous year. (See table).

The situation could have been worse but for the better growth shown by the non-agri commodities on the MCX. While the other two exchanges showed a steep decline in both agro as well as non-agro commodities, the MCX rode high on its non-agri performance. As a result, the share of the exchange increased to 71.67 per cent compared with 54.53 per cent in the first quarter last year. Experts said this was due to the MCX’s preference for commodities such as metals and energy that have global references. The NCDEX’s market share dipped to 26.80 per cent (39.03 per cent) and the NMCE’s to 1.53 per cent compared with 6.44 per cent in the same period.

Market players said the delay in amending the Forward Contract Regulation Act has stalled the introduction of new products such as options trading and index-based trading. The entry of new players – banks and mutual funds – is also awaiting the passage of the Bill, which was expected to give more powers to the market regulator – the Forward Markets Commission.

The turnover started falling after the government delisted for futures trading some commodities like tur, urad in January and wheat and rice in February-end. “These measures have dampened the sentiment and affected the interest of traders and hedgers in the agriculture commodity futures,” said Chintan Modi. Head commodities, India Info line Commodities. The agri commodities turnover has come down by 36.35 per cent in the first quarter of the current financial year. He said that the good performance of the equity market in the last few months has also resulted in traders moving out from commodities.

Many stock brokers, who entered commodities, are facing attrition and even genuine players are afraid of hedging in agri commodities.

Mohan Natarajan, director, Kotak commodities, said that the RBI’s decision to ban individuals from trading in leveraged products has affected the market turnover in that arbitrageurs can no longer take advantage of price differences between international exchanges and domestic exchanges.

Explaining the scenario, another broker whose volumes have fallen by a fourth, said that excessive speculation in some commodities such as pepper and jeera also kept genuine traders away from the market. The buzz in the market is that Ketan Parekh is active in some of these commodities.