An Explainer on Commodities Trading and India's MCX
Our country is truly blessed with an abundance of natural resources. We have some of the largest reserves of metals in the world. A majority of our population is engaged in agricultural activities, and essential pulses and grains are grown in plenty. Such resources or commodities drive industries and provide a source of livelihood to farmers.
At the same time, there are exchanges in India that provide a platform to trade commodities such as gold, copper, crude oil, and even pulses! In this article, we will briefly discuss the concept of commodities trading. More importantly, we shall analyse MCX, the largest commodity derivatives exchange in India.
What is Commodities Trading?
A commodity is any basic good that is interchangeable with other goods of the same type. It can be a group of items that are essential for everyday life, such as food, energy, or metals. Simply put, commodities trading is the buying and selling of basic goods such as metals, energy, and agricultural products. Commodity markets/exchanges provide a centralised platform for producers (farmers, power generation companies, etc) to easily sell their commodities to consumers.
Commodities trading usually takes place through derivative contracts such as commodity futures and options (F&O). These are contracts that derive their value from the underlying commodity itself. An agreement can be formed to buy or sell a predetermined quantity of a commodity at a specific price on a specific date in the future. At the time of maturity, one can either take physical delivery of the commodity or settle in cash, as per the terms of the contract. There are spot markets as well, wherein commodity trading happens instantly and in exchange for cash.
Commodities traded on an exchange include:
- Metals - Gold, Silver, Platinum, and Copper.
- Energy - Crude oil, Gasoline, Heating gas, etc.
- Agriculture - Wheat, Rice, Cocoa, Ragi, Soy, etc.
- Livestock & Meat - Eggs, Cattle, Pork, etc.
Commodity trading is usually done in lots, such as barrels of oil, bushels of corn, kilograms of wheat, etc.
Company Profile - Multi Commodity Exchange (MCX)
Multi Commodity Exchange of India Ltd (MCX) provides a platform to facilitate the online trading of commodity derivatives in our country. It started operations in 2003 and is regulated by the Securities and Exchange Board of India (SEBI). When many entities buy and sell commodity derivatives on an exchange and negotiate on prices, it can lead to better price discovery. It provides a better estimate of the true value of a commodity at a particular point in time.
Just like any other exchange, MCX derives its revenues from transaction fees, admission & subscription fees from brokers, and terminal charges. The company’s transaction fees are calculated on the total turnover (or overall value) of the commodity futures and options (F&O) contracts. MCX has a 95.04% share in the Indian commodity derivatives market!
An important feature offered by MCX is its series of India Commodity Indices or iCOMDEX, which provides real-time data of commodity futures price indices. If you visit their website, you can analyse different indices that are based on commodity futures contracts traded on the exchange. It includes iCOMDEX Base Metals, iCOMDEX Bullion, iCOMDEX Crude Oil, and many more. These indices conform to the best global practices set by the International Organisation of Securities Commissions (IOSCO).
The company operates a web-based data service known as Commodity Receipts Information System or ComRIS. It maintains an electronic record of all transactions made on commodities from registered warehouses. MCX transmits this recorded data online in real-time. Trading volumes, prices, and changes in prices are completely transparent on MCX.
MCX also provides trade clearing and settlement services and data feed services. Moreover, they have strategic alliances with leading exchanges across the globe. This includes Dalian Commodity Exchange (China), London Metal Exchange, Taiwan Futures Exchange, and Zhengzhou Commodity Exchange (China). These collaborations allow MCX to seamlessly integrate its operations with the global commodities ecosystem.
Main Commodities Traded on MCX:
- Bullion - Gold, Gold Guinea, Gold Petal, Gold Petal (in New Delhi), Gold Global, Silver.
- Agriculture Commodities - Cardamom, Cotton, Crude Palm Oil, Kapas, Mentha Oil, Castor seed, RBD Palmolien, Black Pepper.
- Energy - Crude Oil, Natural Gas, Brent Crude Oil
- Metal - Aluminium, Copper, Lead, Nickel, Zinc, Brass
Financial Overview of MCX
The company’s revenue and profit growth has been quite inconsistent. MCX reported a 41.3% year-on-year (YoY) decline in consolidated net profit to Rs 38.44 crore for the quarter ended March 2021 (Q4 FY21). Its total income declined by 19.6% YoY to Rs 108.46 crore during the same period. The average daily turnover in commodity futures on MCX declined by 13% YoY to Rs 31,823 crore in Q4 FY21.
Net profit for the financial year 2020-21 (FY21) declined by 4.77% YoY to Rs 225.22 crore. The company’s Earnings Per Share (EPS) fell 4.8% YoY to Rs 44.25 in FY21. Based on certain assessments, MCX said the Covid-19 pandemic had a very minimal impact on its operations.
Let us take a look at some of the positive financial cues. Over the past five years, the company’s profits have grown at a good CAGR of 20.31%. MCX is almost debt-free. The company is also well-known for declaring huge dividends. It has maintained a healthy dividend payout of 65.72%. [Dividend Payout Ratio refers to the percentage of net earnings that is distributed to shareholders in the form of dividends].
Trading in commodities can be a great way to diversify your portfolio. A large number of investors use commodities to limit their risks on other financial instruments (also known as hedging). It also provides great liquidity. However, there are a large number of factors that can influence commodity markets. As we know, weather conditions influence the production of agricultural commodities, and thereby its prices. The economic and political conditions of a country can have a significant impact on commodity prices. You should have a broad understanding of the different cycles (trends) of commodity prices.
You can easily trade in commodities through brokers such as Zerodha, Upstox, Angel Broking, etc.
On the other hand, MCX as a company/stock is favoured by many investors due to its future growth potential. Ace investor Rakesh Jhunjhunwala recently increased his stake in the commodity trading platform from 3.92% to 4.90%. MCX has announced plans to introduce futures contracts on more commodities across different categories.
Have you invested in MCX stock? Let us know your views on commodities trading in the comments section of the marketfeed app.