Interview of CEO of MCX on launching Brass futures contract

• Interview of CEO of MCX on launching Brass futures contract from Jamnagar
• Why did you choose Brass as it’s an alloy of Copper and zinc, both of which are listed on your exchange and doing exceedingly well.

First let’s understand how this industry works. As you rightly said it is an alloy of copper and zinc. Both of these are in the proportion of 60:40 respectively. However, the proportions can be tweaked to customise it for specific applications. Now as far as the pricing is concerned, the industry looks at the London Metal Exchange (LME) prices of zinc and copper where copper prices play a more critical role as it is the larger component in the alloy. On a broader basis, the calculation is done by taking  LME copper prices into consideration - the percentage of which could vary - and subtracting lead and other impurities the rest would be the price for zinc. So while brass can be alloyed with primary copper and zinc, in reality it is scrap from which most of the brass is made. And scrap has its own demand-supply dynamics since it is imported in massive quantities. This has a strong influence on prices, putting the processors vulnerable to price risk. Besides this, the overall demand for brass in domestic and international markets also have their influences on prices. Most of the deals are negotiated bilaterally and there is no international or domestic benchmark for brass prices that the industry can use. With primary metal prices being volatile and scrap having its own supply dynamics, this leaves the industry very vulnerable to price fluctuations. Which is how we thought that MCX could step in and provide a price discovery platform as well as a hedging tool to the brass industry by launching a futures contract. The launch of this contract, will also mark the beginning of many firsts for MCX. It will be the first brass futures contract in India, the first in the international market as there is no exchange in the world that runs a Brass futures contract and the first delivery-based contract from the stable of non-ferrous futures contracts currently running on MCX. Also, brass is one of the approved products that can get listed on an Exchange based on the SEBI circular that was released in September of 2016.

• Any specific reason for choosing Jamnagar as your basis centre?

Jamnagar has close to 5000 big and small units in the SME and MSME segment involved in the manufacturing of various brass products. From sanitary fittings, to hardware, to auto components to electrical fittings you name it and Jamnagar makes the required product. They also make highly customised products for industries with specific requirement and precision. That is the versatility of the industry there. The entire value chain exists there right from Scrap Importers to foundries to Extrusion plants and the final Product Manufacturers. On any given day, the city processes anywhere between 400 to 600 MTs of brass from scrap and converts it into finished product. Rising exports to Europe, US and Middle East countries is something worth appreciating. So Jamnagar is a real success story which clearly has a pole position in doing everything right in the recycling industry. It has over 90% per cent of the domestic markets share and is extremely competitive in its pricing which clearly gives this town huge cost advantage. Now of all of these accomplishments but with no access to a standard financial hedge instrument which would settle via deliveries would always keep the Jamnagar on a back foot and hence we thought it’s the most apt place to have our basis here.

• Since you said that the industry looks at coper and zinc prices for its brass pricing, I am sure some of the industry participants would be using your copper and zinc contracts to hedge. In that case do you see any volume shifting from copper and zinc to brass

I don’t think that would happen much. In fact, we will attract a newer set of participants to this contract. Jamnagar like I mentioned earlier has 5000 units all involved in the business of brass and across the value chain so this could only add more participants to the Exchange.

• Do you think the brass industry in Jamnagar is ready for a futures contract given the fact that it is dominated by a whole host of SME and MSME units and is still fairly unorganised in structure?

Yes the market in Jamnagar is dominated by the MSME segment and is secondary in nature. Now if you look at the value chain right from the brass scrap importer to the final product manufacture they all stand at a price risk and this contract will help all the stakeholders. So, our primary attempt is to provides this market with a more organised and robust price discovery platform which will not only help this industry to use a common benchmark price but also help them to hedge their price risk by using the MCX brass futures contract. It’s a tall order but we are confident that we should be able to achieve this over a period of time. Besides, our contract will be a delivery based one and while Exchanges cannot be an alternative sources for delivery, it will still provide the brass industry a platform to deliver or procure their product, as long as it confirms to the quality specs given in the contract.

• Why did you list Brass Ingots/Billets and not scrap when the quantity of scrap imported into Jamnagar is very large

The Ingots and Billets are intermediate products. Once scrap is sorted, it is melted and made into Ingots and Billets. These then get cast and extruded and then the final products are made. The reason we listed the intermediate product is because while the quantity of scrap imported is huge and the scrap importers definitely stand at a massive price risk – both , from a  commodity as well as a currency perspective, there is no standardisation in scrap. Most of the scrap is imported from US, UK, Africa and The Middle East and it does not come in any homogenous form. Therefore, to create a pricing benchmark for any non-standardised product is very very challenging. Besides, there will always be an element of uncertainty for players who process scrap to create finished products due to the absence of any common price yardstick. We sensed a huge opportunity to bridge this gap and devise an acceptable benchmark price. And an intermediate product is apt for setting a standard price. The Ingot/Billet that we have listed conforms to the BIS Standards and is a very popular grade used by close to 60% of the market in Jamnagar.  Besides, experience in other contracts that are successful on the Exchange only shows that it is always best to list a product which appeals to a mass audience and would help the entire value chain to use that product for their price benchmarking. In this case we found the IS – 319 Grade 1 – free cutting Brass as the perfect fit for the brass industry price benchmarking as well as hedging purpose.

• Will you look at other centres for delivery other than Jamnagar?

So from what I understand, Moradabad and Jagadhiri in UP, are two large centres for Brass. Moradabad is very big in the handicrafts segment, and Jagadhiri is very popular for its brass Utensils. There are also certain large players across the Rewari and Bhiwadi belt again in UP. But most of them create very customised brass products for the consuming industries. Surprisingly there aren’t any brass industries in the South or the East. It is the North and the West which are catering to these two markets. So we expect that these centres will also start looking at MCX as a common benchmarked price for the brass industry once the contract on the Exchange takes off in a bigger way and the price discovery process becomes robust. However, if going forward, the industry demands then we will definitely be open to looking at having more delivery centres in the north. But for now it is Jamnagar. In fact, Jamnagar wins hands down when it comes to the scale of operations in Brass and the competitive pricing that the brass industry her provides. I have been told that even some of the international countries which are known for their very completive pricing in the metals segment, do not stand a chance when it comes to the prices offered by Jamnagar in brass.  

• Do you see any hurdles in delivery?

We have all the necessary infrastructure in place for a smooth delivery. We already have warehouse in place in Jamnagar in the industrial area of the town. Most of the industries there are located in the radius of 4-5 Kms and hence deciding on the location was very easy. We also have a NABL approved testing lab in place and we are pretty confident we will surely see some deliveries in the first settlement cycle of the contract itself  

• How many contracts will be launched in the beginning and what will be their settlement like

So we plan to go live on March 26 and we will begin by launching April, May and June futures contracts. The contracts will expire on the last trading day of the month and will be a compulsory delivery contract. Which simply means that if the buyer and seller will have to take or give delivery if they choose to stand till the end of the contract. All participants who would want to hedge but would not like to give delivery should ideally square off their positions before expiry. As this will be a delivered contract it will be inclusive of all taxes, and duties but will exclude GST. Goods that will confirm to the specifications as mentioned in the contract will be accepted as good delivery on the Exchange. We will also provide the details of delivery in our warehouse on our website

• Talking about GST, will that help the contract?

With GST coming in the problems of excise and hence metals not being MODVATABLE after changing hands twice becomes a non-issue now. This will helps the delivery process to be smoother. Eventually we also plan to add this in COMRIS - the MCX electronic depository – which will reduce a lot of documentation and paper work for the buyers and sellers.  

• How do you plan to get participation in this contract

We have already started reaching out to the industry to participate in this contract. Our team has been camping in Jamnagar for the last few months to make the industry understand the nuances of Brass futures and how it will help the industry benchmark their price and mitigate their price risk. We have garnered a great response form the Jamnagar market and most of the industries have shown very positive attitude towards having a futures contract. We will soon be conducting training programmes in Moradabad and Jagadhiri for the brass industries there as well. We are also targeting other brass clusters across India. Besides this, we have already conducted training programmes for our members so that they are well equipped to understand brass futures contract in detail and in turn educate their clients. Our training programmes will be a continuous processes for the brass industry as well as the market participants all of who will be contributing to the success of the contract.