Informist, Wednesday, Nov. 27, 2024

By Sandeep Sinha and Abhijit Doshi

MUMBAI – The Multi Commodity Exchange of India has no plan to introduce a copper mini contract, according to Chittaranjan Rege, head of Base Metals at MCX. After the exchange launched aluminium mini, lead mini and zinc mini contracts in February 2023, there were market talks about copper mini contract as well.

According to Rege, the three mini contracts received favourable market response. "These mini contracts make market participation more accessible for people seeking fractional or smaller exposures," Rege told Informist. "For many, the standard 5-tonne contracts are financially unviable, but mini contracts lower the entry barrier. We've already seen an increase in client participation, and as price movements occur, we expect this trend to grow further."

Rege highlighted several challenges in replicating the mini contract model for copper and nickel. Current guidelines from the Securities and Exchange Board of India mandate that the trading and delivery units must align, ensuring producers and sellers can liquidate their inventory effectively through the exchange.

"For aluminium, lead, and zinc, aligning a 1-tonne trading unit with a 1-tonne delivery unit was feasible, enabling us to launch mini contracts. However, copper poses a different challenge due to its market structure and higher margin requirements," Rege explained.

For physical traders handling copper, transactions typically involve large volumes--up to 50 tonnes split into 20 bundles of 2.5 tonnes each. This makes the margins and investments considerably higher, creating additional barriers for smaller buyers.

The Securities and Exchange Board of India regulations currently allow exchanges to introduce multiple contracts per commodity, provided the trading and delivery units remain the same. This ensures sellers are not burdened with unsold inventory due to fragmented demand.

"SEBI's rationale is clear, they want to protect sellers from being stuck with unsold inventory, even if financially compensated. This policy allowed us to align smaller trading and delivery units for metals like aluminium, lead, and zinc," Rege elaborated. However, the situation for copper is different. A physical market trader, who wants to transact 50 tonnes of copper, gets 20 bundles of 2.5 tonnes each. "The margin requirements are high and one has to marshal courage to invest, which actually becomes a challenge," he said.

So far in 2024, copper was the most traded industrial metal on the MCX with trade value of INR 4.03 trillion, followed by zinc at INR 1.7 trillion, aluminium at INR 808.56 billion, and lead at 180.05 billion, the exchange data showed.

We have to actually introduce a bigger contract of copper so that the existing contract appears mini, and it is very impractical for the ordinary investors to really shell out because it's a big multiplier, the price is high at INR 900 per kg or INR 800 per kg and with 2,500 kg multiplier it becomes a big size, he said.

The exchange has completed physical delivery of 2,772 tonne of aluminium, 2,693 tonne of copper, 720 tonne of lead and 349 tonne of zinc in October.

Despite the popularity of mini contracts, their trading volumes still lag behind larger contracts. Rege acknowledged that while mini contracts attract more participants, they are unlikely to match the transaction scale of standard contracts.

Looking ahead, MCX remains committed to expanding its offerings while ensuring alignment with the SEBI's guidelines. For now, a copper mini contract is off the table, but the exchange's focus on innovation and accessibility continues to drive its strategy, said Rege. End

Edited by Akul Nishant Akhoury

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