Amidst global certainty, experts suggest MSMEs to cover price risks through hedging

edging

Base metals such as copper, nickel, lead and aluminum are key raw materials in critical manufacturing sectors such as defence, capital goods, automobiles, power equipments and other industrial activities. These metals find applications across the economic value chain, from simple hand-held tools to complex computing machines. However, the prices of these base metals are exceptionally sensitive and susceptible to external factors, which can adversely impact enterprise profitability. This price volatility disproportionately affects micro, small, and medium-sized enterprises (MSMEs), as many of them already operate on slim profit margins. In FY23, the average price volatility for aluminum was 31%. Similarly, other base metals also witnessed significant price volatility in recent years, which has the potential to affect input costs, competitiveness, and profit margins for MSMEs.

Hedging is an effective tool to manage price risk. All India Association of Industries (AIAI) and MVIRDC World Trade Center Mumbai organized an awareness seminar on the importance of hedging to manage price risks in base metals on Wednesday, October 11, 2023. The event was organized in collaboration with Nuvama Professional Clients Group.

India’s leading exchange the Multi Commodity Exchange of India (MCX) also participated in this event. Mr. Jaydeep Tahashildar, Assistant Manager, Business Development, MCX introduced the commodity exchange to the audience and briefly demonstrated how MSMEs can utilize the exchange for hedging price risk. He also briefed the audience about the MCX delivery options, warehousing, and commodity quality-related policies at the exchange. MCX is a Mumbai-based commodity exchange with more than 95% share in the Indian commodity derivative markets. Agro, bullion, and base metals are the commodities currently traded on the MCX platform.

From Nuvama, a wealth and investment management firm, Mr. Prakash Prabhu, product manager of commodities gave a presentation on how derivative contracts can be used by MSMEs for efficient price management of base metals. MSMEs have options to choose between two contract sizes, viz. ordinary- size or mini-size contracts, depending on their requirements. The ordinary lot size for aluminum is 5 metric tonne (MT), while the mini-size contract is available for 1 MT. Similarly, MSMEs may hedge their positions in other base metals such as lead, zinc, and copper. They can take delivery of these contracts at primary delivery centers, such as Raipur for aluminum, Chennai, Thane, Kolkata for lead, and Thane for Zinc, among others. The quality of these base metals delivered on the exchange is guaranteed based on the approved standards of the London Metal Exchange.

In his welcome remarks, Dr. Vijay Kalantri, President- All India Association of Industries (AIAI), Chairman- MVIRDC World Trade Center Mumbai, emphasized the importance of efficient price risk management through hedging for MSMEs, especially for base metals.

Dr. Kalantri mentioned, “Base metals are the backbone of industrialization as they are the key inputs in engineering, defence, aerospace, heavy machineries, railways, power and other critical sectors. In this uncertain global market, we are seeing huge volatility in prices of iron & steel, aluminum, copper, zinc and other base metals. Huge price changes in base metals affects cost and profit margins of MSMEs and large corporates.”

Given their price volatility, Dr. Kalantri advised MSMEs to hedge their positions to minimize the impact of price volatility on their business earnings. Dr. Kalantri also presented the vote of thanks for the seminar.

The seminar was attended by members of trade and industry from across different sectors.

(In picture from left to right: Mr. Jaydeep Motiram Tahashildar, Assistant Manager, MCX India Ltd; Dr Vijay Kalantri,  President- All India Association of Industries (AIAI) and Chairman -MVIRDC WTC Mumbai; Mr. Abhilash Koikkara, Head, FX and Commodities, Nuvama Professional Clients Group; Mr. Prakash Prabhu, Product Manager- Commodities, Nuvama Professional Clients Group)