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Metal Product Contracts on NCDEX
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AgendaAgenda
About Base Metals About Ferrous Metals Hedging on NCDEX Steel futures contracts NCDEX Steel long contract specifications About NCDEX
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Introduction to Base Metals Introduction to Base Metals
Metal that oxidizes or corrodes relatively easily is known as Base Metal.
- E.g. Copper, Aluminum, Nickel, Lead, Zinc etc.
Base Metals are usually refined before they can be used
Base Metals have wide Industrial uses
Base Metals are widely traded in both Physical & Futures markets.
Major Global Exchanges where Base Metals are traded are LME, SHFE and COMEX
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Industrial Applications of Base Industrial Applications of Base MetalsMetals
Copper: - wires, electro magnets, piping, coinage, household products etc.
Aluminum: - packaging, construction, transport vehicles, building of ships etc.
Nickel: - stainless steel, magnets, coinage, rechargeable
batteries etc.
Lead: - lead-acid battery, construction etc.
Zinc: - galvanizing, paints, used as alloys etc.
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Indicative Statistics for Copper and ZincIndicative Statistics for Copper and Zinc
Key Facts:
• India’s contribution to world production is very small (less than 2%)
• China is largest consumer of Base Metals
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Contract Specs – Non-Ferrous MetalsContract Specs – Non-Ferrous MetalsCopper Copper CathodeCathode
Nickel Nickel CathodeCathode
Aluminium Aluminium IngotIngot
Zinc IngotZinc Ingot
Contract Size 1 MT 250 kg 2 MT 5 MT
Tick Size 5p / kg 5p / kg 10p / kg 5p / kg
Delivery Unit 1 MT 250 kg 2 MT 5 MT
Quality Spec ASTM B 115 /95, and IS 191(London Metal Exchange Approved Brands and Hindustan Copper Ltd. only)
4"X4" Cut Cathodes, Primary Nickel of 99.80% minimum purity, chemical analysis conforming to ASTM B-39/79 specification
Aluminum of 99.7 % purity and each slab weighing 12 - 26 kgs As per IS 2590 -1987
IS 209 -1992
Delivery Location
Mumbai Bhiwandi Bhiwandi Bhiwandi
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Global Base Metals ExchangeGlobal Base Metals Exchange
London Metal Exchange – All Base Metals Linkage in India to – Zinc, Aluminium, Nickel & Tin
NYMEX (COMEX) – Copper Linkage in India to – Copper
Shanghai Future Exchange – Copper & Zinc No Linkage
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Factors Affecting Metal PricesFactors Affecting Metal Prices
Global Economic Outlook Positive/Negative outlook may increase/decrease demand Key indicators may include numbers related to Inflation,
GDP, Inventories etc.
Supply Constraints Geopolitical Tensions Increase in Cost of Investment Government Policies etc.
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Overview on Steel - Key FactsOverview on Steel - Key Facts Steel is an alloy of iron and carbon and usually mixed with other
alloying elements
Steel is second most traded commodity after energy
World steel production was 1300 MMT in 2008 & 1109 MMT in 2009
China is the worlds top steel producer and consumer
India is the worlds 5th largest steel producer
Steel is not well traded in overseas exchanges
NCDEX is the only exchange in the world to have success on steel futures
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Top 10 steel producing countries in Top 10 steel producing countries in 20092009
China (567 MMT) Japan (88 MMT) Russia (60 MMT) USA (58 MMT) India (56 MMT) South Korea (49 MMT) Germany (33 MMT) Ukraine (30 MMT) Brazil (26 MMT) Turkey (25 MMT)
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Features of steelFeatures of steel Steel industry is classified into 2 types:
Main producers Secondary producers
Steel products are classified into 2 categories: Flat products Long products
Indian steel industry is 40% flat and 60% longs by production
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Features of steelFeatures of steel Main producers produce steel from iron ore
Secondary producers use scrap, sponge iron to produce steel
Secondary producers are predominantly producing long steel
Secondary producers are present in all the states in India
NCDEX steel long contracts cater to the long steel segment
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Factors affecting steel pricesFactors affecting steel prices Raw material prices viz., iron ore, scrap
Demand in various finished steel products
Mandi Gobindgarh market is considered to be the price benchmark and price trend driver
Price changes done by the main producers
Govt policies
International markets price dynamics
Freight
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Prospective Industry Prospective Industry Furnace Owners Brokers Rolling Mills Construction Houses Scrap Buyer & Sellers And all other involved in Value Chain Participants of Sponge Iron,
Billets, Channels, WRC etc.
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Major steel production and trading Major steel production and trading centres centres
Mandi Gobindgarh Gaziabad Raipur Muzzafarnagar Mumbai Kolkata Rourkela Chennai Vishakapatnam Jamshedpur Bokaro Durgapur Kanpur
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A business case….A business case….
You get an order from an esteemed customer for the next three months.
The condition however is that you will have to give a fixed price contract.
Your options:1) You are not sure of your cost. Better not to try risking your margins.
Lose the order.2) Try to be sure of your costing.
Is it possible?
Oh yeah!
Buy the entire raw material requirement to cater to the customer at one time in the beginning. Now you know your cost. You must be comfortable to quote for the next three months now.
Any other option?
NCDEX
We next cover ‘Why’, ‘How’ & ‘When’ of the later option.
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Hedging: Why?
Hedging with futures
About NCDEX
AgendaAgenda
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Overall Corporate RisksOverall Corporate Risks
Corporate Risks
BUSINESS FINANCIAL CREDIT OPERATIONAL
Marketing
Competition
Reputation
Product Acceptance
Quality
Foreign ExchangeForeign Exchange
Interest RateInterest Rate
Raw Material CostRaw Material Cost
Default
Counter-party
Country
Controls
Systems
Data Quality
Natural Disaster
Regulatory
Fraud
Hedging is a strategy designed to minimize exposure to an unwanted risk in business , while still allowing the business to profit from an investment activity.
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Sponge Iron Weekly Volatility in %
-15
-10
-5
0
5
10
15
20
We
ek
on
we
ek
% c
ha
ng
Volatility - A measure of uncertainty
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Huge money at risk : Any Solution?Huge money at risk : Any Solution?
HEDGING
To reduce the risk of loss in the business due to an unexpected change in the value of a product in a volatile market
To protect and fix prices
To keep within budget
To maintain/control profit margins
To ensure steady cash flow
To reduce investment risk
Objective
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Hedging : Options AvailableHedging : Options Available
Buy the annual requirement at one time.
Get into fixed price contracts with suppliers of steel.
Hedge steel prices at NCDEX.
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Hedging : Options AvailableHedging : Options Available
Buy the annual requirement at one time.
Get into fixed price contracts with suppliers of steel.
Hedge steel prices at NCDEX.
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Hedging : Options AvailableHedging : Options Available
Buy the annual requirement at one time.
Get into fixed price contracts with suppliers of steel.
Hedge steel prices at NCDEX.
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Hedging at NCDEXHedging at NCDEX
Capital not blocked : Margin money to be deposited.
No counterparty risk; Exchange assumes the financial risk on behalf of the counterparties.
Better financial planning: Cash outflow towards raw materials known at the start of the period / financial year.
Better credit rating : Financial Institutions would tend to rate (debt/bond rating, grading for IPO etc.) a company which has secured its cash flows better as compared to one which is open to price fluctuations in the market.
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The Process of HedgingThe Process of Hedging
Take position of amount of future consumption on NCDEX
Buy Raw-Materials in the physical market from supplier.
Square off position on NCDEX
Today Future Date
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Example of HedgingExample of Hedging
Cash market (Physical Suppliers’ Market)
Futures market (NCDEX)
Today: Physical market price Rs.30000 / MT
Buy Steel Futures contract at Rs.26650 / MT for Jan 2010 maturity
In Jan 2010: Buy Steel from supplier Case 1. Rs.28000 / MT Case 2. Rs.32000 / MT
Sell (square-off) futures contract at Case 1. Rs.24650 / MT Case 2. Rs.28650 / MT
Results Case 1. Case 2.
Spot paid price Rs.28000 Futures Outflow (Rs.2000) (26650-24650) Net buying price Rs.30000 Spot paid price Rs.32000 Futures Inflow Rs.2000 (28650-26,650) Net buying price Rs.30000
As calculated, irrespective of the level of spot price on maturity, effective purchase price is Rs.30, 000 / MT
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Price Correlation of NCDEX Steel & Other Long Price Correlation of NCDEX Steel & Other Long ProductsProducts
Price Correlation
10000
15000
20000
25000
30000
35000
40000
45000
50000
55000
Jul-08
Jul-08
Aug-0
8
Sep-0
8
Oct-
08
Nov-0
8
Dec-0
8
Jan-0
9
Feb-0
9
Mar-
09
Apr-
09
May-0
9
Jun-0
9
Jun-0
9
Jul-09
Aug-0
9
Sep-0
9
Oct-
09
Nov-0
9
Dec-0
9
Time
Pri
ces (
Rs./
Mt)
Mandi Scrap Raipur Sponge Mandi Billets Mumbai TMT
Delhi Channel Raipur WRC NCDEX Steel Long
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Merging – Spot & FuturesMerging – Spot & Futures
Future/Spot Price Correlation
12000
18000
24000
30000
36000M
arch
-08
May
-08
July
-08
Sep
tem
ber-
08
Nov
embe
r-08
Janu
ary-
09
Mar
ch-0
9
May
-09
July
-09
Sep
tem
ber-
09
Time Period
Rs.
/Mt
NCDEX Steel Long
Gaziabad Spot
Mandi Spot
Mumbai Spot
Kolkata Spot
Raipur Spot
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Steel ReturnSteel Return
April’05 – 06: -12.12%
April’06 – 07: 9.38%
April’07 – 08: 51.50%
April’08 – 09: -36.80%
April’09 – Till Date : 21.58%
Steel Futures in the past five years has been traded within a Rs. 21374, hitting a high off Rs.36,980/ton & touching bottom at Rs.15606/ton. Average price range for the years past comes to Rs.21,200/ton.
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Live Example Live Example
Currently Prices at Gaziabad are Rs.23,900/ton.
Future prices for Same at NCDEX Rs.25,000/ton.
Expenses for Physical Delivery
Ware House Chares : Rs.2.85/mt/day= Rs.90/month
Assaying Charges : Rs.80/mt
Unloading Charges: Rs.25/mt
C&F Charges: .5% or Rs. 125 in this case
Demat Charges one time per ISIN : Rs.310
Going short at NCDEX at Rs.25,000 will fetch a gain of Rs.780/ton or 3.25%
(25,000 – 23,900-90-80-25-125)= 780
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Physical Delivery - Excise/Cenvat CreditPhysical Delivery - Excise/Cenvat Credit
Steel is subject to 2 levels of duty and taxes. One a central levy viz.; excise duty (ED) and second a state levy viz.; VAT.
The contracts on the exchange are traded at the basic rate i.e. without including ED and VAT.
As per existing structures prevailing, ED is levied @ 10.3% of the basic rate and VAT is levied @ 4% of the sum value of the basic rate and ED value
Only manufacturers and first stage dealers registered under the Act will be able to claim central excise amount to the extent of amount specified in the Central Excise Invoice which will have to be handed over to the buyers.
the buyer will have to be either first stage dealer or second stage dealer duly registered under the Act in order to claim credit under CENVAT.
Fresh Deposits at Warehouse
Existing Deliveries at Warehouse
1. ED is leviable @ 10.3% of the Final Settlement Price (FSP) and VAT would be leviable @ 4% of the sum of the FSP and the ED leviable on the FSP.
ED payable during buying will be the value of the ED in terms of Rs/MT (and not percentage) that the seller would have paid for and would be known one day before the supplementary settlement
VAT will be computed at the same fashion as that of ED
On subsequent selling, the ED value & VAT in Rs/MT that was paid during the buy leg of the transaction would be recovered from the corresponding buyer.
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Deliveries at ExchangeDeliveries at Exchange
Delivered Quantity
0
2000
4000
6000
8000
10000
12000
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Time Period
Qu
an
tity
(M
T)
Delivered Quantity
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Steel Contract – Defining an Era Steel Contract – Defining an Era
March ‘2005 : Launch of Mild Steel Ingot, Ex- Ghaziabad basis.
April’ 2005 : Accreditation of Additional Warehouse
May’2006 : Change in Contract Specification, for wider acceptance from Industry participants (Quality Norms)
October’2007 : Change in tick size
August’2008 : Introduces Billets delivery acceptance & Changed contract from Steel Ingot to Steel Long and also increased no of delivery centres to 8
October’2009 : Compulsorily Delivery Contract Steel Long futures touched an all time high volume of Rs.215 Cr. in Dec’09. Overall Open Interest stands at 76,000 MT.
On ongoing nature and feedback from the Industry participants, contracts is been changed like that off Additional Delivery centers, quality norms etc
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Contract specifications – Steel Long
Basis : Ex-Warehouse at Ghaziabad (exclusive of all taxes and duties)
Unit of trading : 10 MT
Delivery unit : 10 MT
Quotation/base value: Rs. per MT
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Contract specifications – Steel LongContract specifications – Steel Long
Quality specification : A) MS Ingots
Size : 3 1/2” * 4 1/2” Carbon content : upto 0.3% Manganese : min of 0.40% Sulphur : 0.06% max Phosphorus : 0.09% max S + P : 0.14% max Length : min 0f 48 inches/ingot Weight : min of 90 kgs/ingot
Ingots without harmful and appreciable hollowness, piping, refractories and rising
Heat no. to be mentioned on each ingot
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Contract specifications – Steel LongContract specifications – Steel Long
Quality specification : B) MS Ingots
Size : 3 1/4” * 4 1/4” Carbon content : upto 0.3% Manganese : min of 0.40% Sulphur : 0.06% max Phosphorus : 0.09% max S + P : 0.14% max Length : min 0f 48 inches/ingot Weight : min of 90 kgs/ingot
Ingots without harmful and appreciable hollowness, piping, refractories and rising
Heat no. to be mentioned on each ingot
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Contract specifications – Steel LongContract specifications – Steel Long
Quality specification : C) MS Billets
Size : 100 * 100 to 130 * 130 Carbon content : upto 0.3% Manganese : min of 0.40% Sulphur : 0.06% max Phosphorus : 0.09% max S + P : 0.14% max Length : 6 m +/- 200 mm Billets to be free from open and harmful surface defects Billets should be suitable for re rolling. Heat number to be mentioned on each billet. Mill Test certificate to accompany for each heat MS billets to have a premium of Rs 700/MT over MS Ingots
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Contract specifications – MS IngotsContract specifications – MS Ingots
Tick size: Re.10/- per MT
Quantity variation : +/- 3% or 5 Tons, whichever is lower
Additional Delivery centers at Mandi Gobindgarh, Raipur, Durgapur, Mumbai, Chennai, Jaipur and Jharsuguda
Duration: One to Five months
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Contract specifications – Steel LongContract specifications – Steel Long
Delivery specification :Compulsory delivery
Premium/Discount on Location
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Delivery Location (Premium & Discount)Delivery Location (Premium & Discount)
Ghaziabad (basis centre : No premium/discount)
Mumbai (discount of Rs 280/MT from basis centre for contracts expiring on & after June’10; till May’10 expiry discount of Rs 780/MT)
Chennai (discount of Rs 500/MT from basis centre)
Durgapur (discount of Rs 1900/MT from basis centre)
Jharsuguda (discount of Rs 2000/MT from basis centre)
Mandi Gobindgarh (premium of Rs 650/MT from basis centre for contracts expiring on & after June’10 till May’10 expiry premium of Rs 790/MT )
Raipur (discount of Rs 1500/MT from basis centre)
Jaipur (discount of Rs 400/MT from basis centre)
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Expenses to be incurred for Delivery SettlementExpenses to be incurred for Delivery Settlement
Warehouse charges: Rs 2.85/MT/day
Delivery in demat mode only
In case of fresh deposit assaying (testing) charges will be levied. The estimated assaying charges will be around Rs 80/MT.
In case of fresh deposit unloading charges @ Rs 30/MT will be levied.
For fresh deposit as well as for buying and selling on the basis of deliveries on the exchange platform the invoicing charges will be levied by the Warehouse Service Providers (WSP) at the respective locations. You may call upon the respective WSP for the exact charges.
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Steel Long Contracts – a reviewSteel Long Contracts – a review
Launched on : March 11, 2005
Avg. trading daily : 22,000 MT volumes
Highest daily traded : 80,550 MT on Dec 23, 2009 volume
Open Interest : 76,000 MT
Deliveries : 33,000 MT at various exchange accredited locations
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Salient Features for Steel Long Salient Features for Steel Long
Adequate volume & liquidity
Ideal Hedging & Risk Management Platform for the Value Chain participants in Long products industry
Compulsory delivery contract
Justified Premium/ Discount structure for fair pricing across the country
Widely accepted quality specifications
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Websites reference for metals Websites reference for metals
www.basemetals.com
www.icsg.org
www.worldsteel.org
www.steelguru.com
www.metalbulletin.com
www.steelbb.com
www.ilzsg.org
www.lme.co.uk
www.shfe.com.cn
www.ncdex.com
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Process of contract design and development on Process of contract design and development on NCDEX NCDEX
Commodity research
Constitute a Product Committee
Commodity grade selection
Commodity awareness sessions
Logistics and delivery
Emphasis on value chain participants
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Our ShareholdersOur ShareholdersInstitution Shar
eDomain Expertise
NABARD 15 % Apex bank for agricultural lending
NSE 15 % Largest stock exchange in India. Highest volume in single stock futures in world.
LIC 15 % Largest life insurance company in India
CRISIL 12% India’s first & largest credit rating agency. Now a Standard & Poor company
IFFCO 12% Largest farmer cooperative with affiliation of 36,000 cooperatives
PNB 8% Large public sector bank with strong rural reach specially in North India
Canara Bank 8% Large public sector bank with strong rural reach specially in South India
Goldman Sachs 5% Global Expertise in commodity markets
Intercontinental Exchange 5% 6th largest commodity futures exchange in the world
Shree Renuka Sugars Ltd 5% Leading sugar producer in India
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NCDEX RoleNCDEX Role
Price Discovery & Dissemination
Platform for Hedging by Participants
Management of Counter party Credit Risk
Self Regulation to ensure
Overview of Trading and Surveillance
Audit and review of Members
Enforcement of Exchange rules
An Exchange provides a a common meeting ground for all commodity participants
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Products offeringsProducts offerings
Agriculture Metals Energy Others
Grains Pulses Oil & Oilseeds Spices Fibres Plantations Softs Others
Precious Ferrous Non-ferrous
Crude Oil Natural Gas Coal
PolymersCFI
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Thank you
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