metal products contract

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 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

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55000

Jul-08

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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

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30000

36000M

arch

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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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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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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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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

metal products contract

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