The Multi Commodity Exchange (MCX) on Tuesday announced its plans to launch spot exchange in base metal. In the last one and a half year, over 1,00,000 tonnes of base metal delivery happened in the bourse. But it lacked in introducing an efficient spot exchange platform. Currently, the base metal futures prices are pegged with the ones trading in the London Metal Exchange (LME).
The price in the London Exchange doesn’t efficiently reflect the demand in India. And so, we need a price discovery mechanism that will help the Indian producers and traders discover the price in the Indian Market, said MCX MD and CEO, P S Reddy.
MCX is the largest and monopoly exchange in commodity trading in India, but until now, it didn’t have a robust spot exchange platform. Reddy said in his statement, “this is one area we will cater in future by setting up a spot market, which will help us arrive at fair price discovery.” The newly introduced spot exchange in base metals will help to discipline the fragmented physical metal market.
What Is Spot Trading In Commodity Market?
A commodity spot market is where physical commodity trading happens. It functions almost like an over the counter (OTC) market where commodity trading takes place based on the creditworthiness of the buyers and sellers. Compared to the spot market, commodity futures market is way more regulated and trades on fixed, standardised contracts. But the spot market leads to efficient price determination by a large number of participants.
Trading in the futures market is costlier as it includes carrying cost and carrying return, along with the cost of locking funds. Moreover, futures transaction involves counter-party risks. Compared to this, the spot market functions faster, acting on an efficient price discovery mechanism. Introduction of spot exchange in base metals by MCX will answer the demand of spot traders in the base metal market.
It seems MCX is actively undertaking reform activities. It is also working along with lead producers to initiate the delivery of domestic refined lead futures of locally recycled lead with 0.998 purity against the current 0.999 purity required in LME. It will come to effect from the next year. Meanwhile, MCX is all set to launch its second cash-settled index from October 19. The index will allow both retail and institutional investors to trade in base metal as a sector without worrying about receiving the physical delivery of goods. Institutional investors are permitted to include METLDEX, as it is going to be called, in MF and ETF funds to build new innovative products for clients.
Spot exchange in base metals will add a new dimension to India’s commodity trading landscape, eliminating London Metal Exchange dependency. It is going to answer the demand of the Indian producers and traders for an efficient domestic price discovery platform.