COPPER Brochure

7/21/2019 COPPER Brochure

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HEDGING PRICE RISK OPP R

Copper, a versatile, beautiful metal, is one of the world s most useful natural resource.



2

OVERVIEW

Copper is one of the first metals used byhumans and used at least 10,000 yearsago for items such as coins andornaments. Copper is a ductile,corrosion-resistant, malleable, metallic

element that is an excellent conductorof heat and electricity. It is alsocorrosion resistant, antimicrobial andeminently recyclable. The versatility ofthis beautiful metal makes it one of theworld’s most useful natural resources.Alloyed with other metals, it can acquireadditional invaluable characteristicssuch as hardness, tensile strength andeven greater resistance to corrosion.Copper and copper-based alloys areused in a variety of applications that arenecessary for a reasonable standard ofliving. Its continued production and use

is essential for society's development.

Risk management techniques are ofcritical importance for participants suchas producers, exporters, marketers,processors, SMEs amongst others.

PRICE RISK MANAGEMENT

Modern techniques and strategies,including market-based riskmanagement financial instruments suchas ‘Copper Futures’, offered on the MCXplatform can improve efficiencies andconsolidate competitiveness through

price risk management. The importanceof risk management cannot beoverstated; the government too has setup high-level committees to suggeststeps for fulfilling the objectives of pricediscovery and price risk managementon commodity derivatives exchanges.

The role of commodity futures in riskmanagement consists of anticipatingprice movement and shaping resourceallocations and achieving these endscan be met through hedging.

Hedging is the process of reducing orcontrolling risk. It involves taking equaland opposite positions in two differentmarkets (such as physical and futuresmarket), with the objective of reducingor limiting risks associated with pricechange. It is a two-step process, where again or loss in the physical position due

HEDGING MECHANISM

to changes in price will be offset bychanges in the value on the futuresplatform, thereby reduces or limits risksassociated with unpredictable changesin price.

In the International arena, hedging in

Copper futures takes place on a numberof exchanges, the major exchangesbeing London Metal Exchange (LME),Chicago Mercantile Exchange (CME) andShanghai Futures Exchange (SHFE).

Hedging is critical for stabilizingincomes of corporates and individuals.Reducing risks may not always improveearnings but failure to manage risk willhave direct repercussion on the riskbearers’ long term income.

In order to gain the most from hedging,it is essential to identify and understandthe objectives behind hedging.

A good hedging practice, hence,encompasses efforts on the part ofcompanies to get a clear picture of theirrisk profile and benefit from hedgingtechniques.

IMPORTANCE OF HEDGING

From the beginning of civilization copper has been used by various societies to

make coins for currency. In addition, in areas known to have copper-deficient

soil, copper is used by farmers as a supplement in livestock and crop feed. It

can also kill or inhibit health threatening fungi, bacteria, and viruses,

including water-borne organisms. Copper s excellent heat transfer capabilities

make it an ideal choice for heat exchange equipment, pressure vessels and

vats. It is used for gears, bearings and turbine blades. Aesthetically appealing,

copper and its alloys, such as architectural bronze, are used in roofing , and as

facades, canopies, doors and window frames. Copper s excellent corrosion

resistance make it essential for seawater applications, including vessels, tanks,

piping, propellers, oil platforms and coastal power stations and roofing.

From the beginning of civilization copper has been used by various societies to

make coins for currency. In addition, in areas known to have copper-deficient

soil, copper is used by farmers as a supplement in livestock and crop feed. It

can also kill or inhibit health threatening fungi, bacteria, and viruses,

including water-borne organisms. Copper's excellent heat transfer capabilities

make it an ideal choice for heat exchange equipment, pressure vessels and

vats. It is used for gears, bearings and turbine blades. Aesthetically appealing,copper and its alloys, such as architectural bronze, are used in roofing , and as

facades, canopies, doors and window frames. Copper's excellent corrosion

resistance make it essential for seawater applications, including vessels, tanks,

piping, propellers, oil platforms and coastal power stations and roofing.

PRICE MOVEMENT

CME Parity ( ` /Kg)

MCX /Kg `

300

350

400

450

500

550

J a n - 1 1

A p r - 1

1

J u l - 1

1

O c t - 1

1

J a n - 1 2

A p r - 1

2

J u l - 1

2

O c t - 1

2

J a n - 1 3

A p r - 1

3

J u l - 1

3

O c t - 1

3

J a n - 1 4

A p r - 1

4

J u l - 1

4

Weakness in INR

COPPER: HEDGING PRICE RISK

Strike in Escondida, Chile

Fear of tapering of stimulus

measures by Fed in USChinese economic

concerns

Correlation: 99.2%

EU Debt distress




PARTICIPANT HEDGERS

FACTORS IMPACTING COPPER PRICES

MCX offers a transparent platform,besides bringing about economic andfinancial efficiencies by de-riskingproduction, processing and trade. TheExchange's engagement has led to largeefficient gains in supply chains, withexporters gaining a larger share of

global prices and producers not onlygetting better prices but also muchbetter access to markets.

All those who have or intend to havepositions in physical COPPER areparticipant hedgers.

! Importers! Exporters! Refiners! Processors! Stockists! Fabricators

! Prices ruling in the internationalmarkets

! Fluctuations in USD-INR

! Economic factors: industrial growth,

global financial crisis, recession andinflation

! Commodity-specific events:construction of new productionfacilities or processes, new uses orthe discontinuance of historical uses,unexpected mine or plant closures(natural disaster, supply disruption,

accident, strike, and so forth), orindustry restructuring, all affectmetal prices

! Government trade policies(implementation or suspension oftaxes, penalties, and quotas)

! Geopolitical events

! As societies develop, their demandfor metal increases based on theircurrent economic position, whichcould also be referred as ‘NationalEconomic Growth Factor’.

! Understand the risk profile andappetite while formulating clearhedging objectives.

! Hedging can shield the revenuestream, the profitability, and the

FACTS ON HEDGING

HEDGING EXPERIENCES

1. Hindustan Copper Limited

“Hedging of copper through commodity

exchanges, as a risk management initiative has

been introduced. Requisite steps, likeappointment of brokers, etc., have been

completed for start up of hedging operations.”

(Source: Annual Report 2007-08)

“The Company entered into derivative contract

in the nature of forward contract for sale with

an intention to hedge sale of copper in the

Commodity Exchange Market to minimize LME

price fluctuation.”

(Source: Annual Report 2012-13)

2. Siemens India Limited

“The Company uses Commodity Future

Contracts to hedge against fluctuation incommodity prices.”

(Source: Annual Report, 2013)

3. Aurubis

(Aurubis is a leading integrated copper group

and the world’s largest copper recycler, with

production sites in US, Europe and an extensive

service and sales system for copper products inEurope, Asia and North America)

“ Metal price and exchange rate fluctuations

represent a potential risk in the buying and

selling of metals. This risk is substantially

reduced with foreign exchange and metal price

hedging.”

(Source: Annual report 2012-13)

4. Antofagasta plc

Antofagasta is a Chilean-based copper mining

group with significant by-product production

and interests in transport and water distribution.

“ The Group monitors the commodity marketsclosely to determine the effect of price

fluctuations on earnings, capital expenditures

and cash flows. From time to time, the Group

uses derivative instruments to manage its

exposure to commodity price fluctuations

where appropriate. “

(Source: Annual Report and Financial Statements

2013)

5. Boliden

New Boliden is a Swedish mining and smelting

company focusing on production of copper, zinc,

lead, gold and silver.

“ Boliden’s policy stipulates that risks from

exposure in conjunction with binding

undertakings shall be hedged in full, with the

exception of the smelters’ process inventory.

The Group uses futures contracts to ensure that

the sale price and exchange rate correspond to

those applicable in conjunction with the

signing of a sales agreement at a fixed price.”

(Source: Annual Report 2013.

3

balance-sheet against adverse pricemovements.

! Hedging can maximize shareholdervalue.

! Under ‘International FinancialReporting Standards’ (IFRS) beneficialoptions arise in case of effectivehedges.

! Common avoidable mistake is tobook profits on the hedge whileleaving the physical leg open to risk.

! Hedging provides differentiation tocompanies in a highly competitiveenvironment

! Hedging also significantly lowersdistress costs in the event of adversecircumstances confronting acompany.

! A properly designed hedgingstrategy enables corporations toreduce risk. Hedging does not

eliminate risk it merely helps totransform risk.

! In order to gain the most fromhedging, it is very essential toidentify and understand theobjectives behind hedging and get aclear picture of the risk profile.



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APPRECIATING THE BENEFITS OF HEDGING

Situations prevailing in the Copper industry are given below, which will demonstrate how MCX platform may be used by

participants to manage price risk by entering into Copper Futures contracts. We will look at the impact of price movement in

either direction.

SCENARIO 1

SCENARIO 2

THE SITUATION

Cool Fans is a company involved in the manufacture and retail sales of fans. Significant boom in housing segment has led to sharp growth in consumer durables

segment in terms of volume and sales. Price volatility is of big concern to the company. A consultant appointed by the management has recommended that pricerisk should be managed by taking up position on MCX.

EXPLANATIONst th

The Treasury Team of Cool Fans, short sells 20 lots (1 lot = 1 tonne) of 31 August contract on 12 July and squares the contracts on 30th July. The value of raw material in

the finished goods sale is ` 78,80,000 (394x20x1000) and cash inflow from MCX due to fall in prices is 2,20,000 (11x20x1000). Thus, the net value realized from the sale

of finished goods is 81,00,00 (78,80,000 + 2,20,000), making the net selling price 405 per kg (81,00,000/20,000), which is the budgeted price.

`

` `

EXPLANATIONst th

The Treasury Team of Cool Fans, short sells 20 lots (1 lot = 1 tonne) of 31 August contract on 12 July and squaresth

the contract on 30 July, making a loss of ` 11 per kg. The value of raw material in the finished goods sale isth

83,20,000 (416x20x1000) on 30 July and cash flow outgo on MCX due to rise in prices is 2,20,000

(11x20x1000). Thus, the net value realized from the sale of finished goods is 81,00,00 (83,20,000 – 2,20,000),

making the net selling price 405 per kg (81,00,000/20,000), which is the budgeted price.

` `

`

`

The company, Cool Fans has routine sales of 5000 pieces of fans every month. Based on experience, the company has put forward the following facts

Ÿ The company purchases 20 tonnes of Copper every week to conduct routine production.

Ÿ The processed material will be ready to be sold in 2 weeks.

Ÿ The sale price of finished goods will be as per prevailing price at the time of final sales.

Ÿ

It is difficult to predict the sales price 2 weeks aheadŸ The company’s objective is to lock prices.

GOING SHORT: Scenarios where prices either rise or fall

IF PRICES WERE TO RISE

IF PRICES WERE TO FALL

DETAILSth

12 July

30 Julyth

SELL Copper Futures Contract

Processed material sold,

at ruling price

The net position of the above transactions will negate price risk

MCX PLATFORM PHYSICAL MARKET

DETAILSth

12 July

th30 July BUY Copper Futures Contract

SELL Copper Futures Contract

Processed material sold,

at ruling priceThe net position of the above transactions will negate price risk

MCX PLATFORM PHYSICAL MARKET

Futures

Futures

12-07-201X

12-07-201X

30-07-201X

30-07-201X

406

406

395

417

11 (profit)

11 (loss)

39430-07-201X

30-07-201X

30-07-201X

30-07-201X

Spot

Spot

SELL

SELL

SELL

SELL

BUY

BUY

DATE

12-07-201X

30-07-201X

405 406

395394

COPPER SPOT PRICE COPPER FUTURES PRICEst (expiry 31 August 201X)

DATE

12-07-201X

30-07-201X

405 406

417416

COPPER SPOT PRICE COPPER FUTURES PRICEst

(expiry 31 August 201X)

Net price: 405 ( 416 - 11)selling ` ` `

Net selling price: 405 ( 394 + 11) ` ` `

Raw material bought

BUY Copper Futures Contract

BUY 405

Raw material bought

BUY 405 416

HEDGING AGAINST DOMESTIC SALE


Note:The objective is to lock in prices, to obtain protectionfrom unwanted price volatility, which impacts thebalance-sheet of the company. This has been achieved,through hedging on MCX in both the scenario of risingand falling prices, by which Cool Fans has been able to sell the finished material at the budgeted price itself.



5

THE SITUATION

Bharat Copper is a copper dealer, who buys, stocks and sells refined copper in various forms to a host of users. The Copper market has been extremely unpredictable due to

the price volatility, which is a reflection of international and domestic factors. Bharat Copper enters into tenders to procure large quantities, which are then actually lifted

based on the prevail ing prices. The Company assumes procurement to be done “Just-In-Time” to meet production schedule - WHICH MEANS INPUT PRICES MAY CHANGE !!!

The Company, Bharat Copper buys Copper through tenders and has put forward the following facts.th

Ÿ Tender is passed on 20 September to procure 150 tonnes of Copper

Ÿ The tender is structured, such that 30 tonnes will be physically bought every week at the prevailing priceth

Ÿ The first lot of 30 tonnes is bought physically on 20 September 201X. Thus, the first lot does not undergo any price change.

Ÿ The remaining 120 tonnes will be bought in subsequent weeks in lots of 30 tonnes, every week at ruling prices.

Ÿ The company hedges for 120 tonnes.

GOING LONG: Scenarios where prices either rise or fall

EXPLANATIONth th

The Treasury Team of Bharat Copper, buys 120 lots (1 lot = 1 tonne) of 30 November contract on 20

September and squares the position in a staggered manner in subsequent weeks, whenever the Company lifts

Copper from the physical market at the prevailing spot market price. The company by hedging its position and

making a staggered exit from the futures contract makes the net buying price at Rs. 405 per kg, which is the

budgeted price.

DATE MCX PLATFORMPHYSICAL MARKET OPEN INTEREST

on MCX

th20 September

th27 September

BUY 30 Tonnes BUY 120 lots of Copper FuturesContract of 1 Tonne each

SELL 30 lots of Copper FuturesBUY 30 Tonnes

BUY 30 Tonnes

BUY 30 Tonnes

BUY 30 Tonnes SELL 30 lots of Copper Futures

SELL 30 lots of Copper Futures

SELL 30 lots of Copper Futures

120

90

60

30

0

th4 October

th11 October

th18 October

DATE

th20 September

th27 September

Copper Futures Prices (expiryth

30 November 201X)

COPPER SPOT PRICES

405

408

413

402

401th4 October

th11 October

th18 October

406

409

414

403

402

DATEth

20 September

th27 September

FUTURES MARKET ACTIONSPOT MARKET ACTION Profit/Loss per KG on MCX

BUY BUY

SELL BUY

BUY

BUY

BUY SELL

SELL

SELL

th4 October

th

11 Octoberth

18 October

NET PURCHASE PRICE/KG

30 MT @ 405

30 MT @ 408

30 MT @ 401

30 MT @ 413

30 MT @ 402

120 lots @ 406

30 lots @ 409

30 lots @ 402

30 lots @ 414

30 lots @ 403

3 (Profit)

4 (Loss)

8 (Profit)

3 (Loss)

405

405(408-3)

405(401+4)

405(413-8)

405(402+3)

HEDGING AGAINST TENDERS


The scrap and alloy industry can also use the MCX copper futures contract very easily to hedge their raw material price

risk as along as the price correlation of the physical market is in sync with the copper futures on MCX. For example, a

brass (alloy of copper and zinc ) product manufacturer can easily hedge his copper requirement on MCX futures, to lockin his copper purchase price so that it doesn't have an effect on his final product price.

Note:The objective is to lock in prices, to obtain protectionfrom unwanted price volatility, which impacts thebalance-sheet of the company. This has been achieved,through hedging on MCX in both the scenario of risingand falling prices, by which Bharat Copper has been ableto purchase at the budgeted price itself.

COPPER FACTS

Copper is one of the most recycled of all metals. It is our ability to recycle metals over and over

again that makes them a material of choice. Copper stands at the third place after steel and

aluminium, in the context of consumption. It is an important contributor to the national

economies of mature, newly developed and developing countries.



REGULATORY BOOSTS FOR HEDGERS

1. Income tax exemptions for

hedging. The Finance Act, 2013 has

provided for coverage of commodity

derivatives transactions undertaken in

recognized commodity exchanges

under the ambit of Section 43(5) of the

Income Tax Act, 1961, on the lines of the

benefit available to transactionsundertaken in recognized stock

exchanges.

This effectively means that business

profits/losses can be offset by losses/

profits undertaken in the commodity

derivatives transactions. This enhances

the attractiveness of risk management

on recognized commodity derivative

exchanges and incentivizes hedging.

Hedgers are no longer forced to

undertake physical delivery of

commodities in order to prove that their

transactions are in the nature of

hedging and not ‘speculation’.

2. Limit on open position as against

hedging. Genuine hedgers havingunderlying exposure that exceed the

prescribed OI limits given in the

contract specifications can be allowed

higher limits based on approvals. This

enables hedgers to take positions to the

extent of their exposure on the physical

market and is allowed to take position

over and above prescribed position

limits on approval by the exchange.

ŸCopper: Witnessed annualized price volatility of 19% in 2013

ŸWhich means: A firm in the copper business, with an annual turnover of ` 100 crores was exposedto a price risk of ` 19 crores in 2013;

ŸIndia with an annual copper market size of 6 lakh tons, worth about ` 25,500 crores is exposed to a

risk on account of price volatility to the tune of ` 4,845 crores. (i.e. 19% of the holding value)

HOW MUCH VOLATILITY RISK ARE YOU EXPOSED TO?

ARE YOU PREPARED FOR VOLATILITY RISK?

(Adoption of a risk management practice, such as hedging on the MCX Platform can

help shield against the perils of price volatility)

DAILY AVERAGE VOLATILITY (COPPER MCX PRICES)

VolYEAR 2009 2010 2011 2012 2013

31% 21% 24% 15% 19%

Source: MCX Research Team

ANNUALIZED VOLATILITY

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

J a n -

0 9

J u l -

0 9

J a n -

1 0

J u l -

1 0

J a n -

1 1

J u l -

1 1

J a n -

1 2

J u l -

1 2

J a n -

1 3

J u l -

1 3

J a n -

1 4

J u l -

1 4


BENEFITS OF HEDGING ON MCX:

! India's no. 1 commodity exchange to

trade Copper futures

! Rupee-based contracts

! Time-zone advantage

! Smaller contracts aid hedgers with

smaller tonnage exposure.

! Efficient price discovery mechanism

wherein there is convergence of

financial and commodity market

participants.

! Highly liquid contracts

! Highly efficient and transparent

market



SALIENT CONTRACT SPECIFICATIONS OF COPPER FUTURES CONTRACTS

Symbol COPPER COPPER MINI

Trading Unit 1 MT 250 kilograms

Contracts Available February, April, June, August, Novemberst

Contract Start Day 1 day of contract launch month. If 1st day is a holiday then the following working day.

Last Trading Day Last calendar day of the contract expiry month. If last calendar day is a holiday then preceding

working day.

Trading Period Mondays through Friday : 10.00 a.m. to 11.30/11.55 p.m.

Quotation/ Base Value 1 kg

Maximum Order Size 70 MT

Price Quote Ex-Bhiwandi (exclusive of all taxes and levies relating to import duty, customs, Sales Tax/VAT as

the case may be, special additional duty and octroi). At the time of delivery, the buyer has to pay

these taxes and levies in addition to Delivery order rate.Tick Size 5 paise per kg

Daily Price Limit The base price limit will be 4%. Whenever the base daily price limit is breached, the relaxation

will be allowed upto 6% without any cooling off period in the trade. In case the daily price limit

of 6% is also breached, then after a cooling off period of 15 minutes, the daily price limit will be

relaxed upto 9%.

In case price movement in international markets is more than the maximum daily price limit (i.e

9%), the same may be further relaxed in steps of 3% beyond the maximum permitted limit, and

inform the Commission immediately.

Initial Margin Minimum 5% or based on SPAN whichever is higher

Additional and/ or Special Margin In case of additional volatility, an additional margin (on both buy & sell side) and/ or special

margin (on either buy or sell side) at such percentage, as deemed fit; will be imposed in respect

of all outstanding positions.

Maximum Allowable Open Position* For individual clients: 5,000 MT for all Copper contracts combined together.

For a member collectively for all clients: 25,000 MT or 15% of the market wide open position

whichever is higher for all Copper contracts combined together.

Delivery Unit 9 MT with tolerance limit of + / - 1 % (90 kg)

Delivery Centres Within 20 kilometers outside Mumbai octroi limit.

Quality Specifications Grade 1 electrolytic copper as per B115 specification

Due Date Rate Due date rate is calculated on the last day of the contract expir y, by taking international spot

price of Copper and it would be multiplied by Rupee-US$ rate as notified by the Reserve Bank of

India on that particular day.

Delivery Logic Both Option

Note: Please refer to the exchange circulars for latest contract specifications.

* Genuine hedgers having underlying exposure that exceed the prescribed OI limits given in the contract specifications can be allowed higher limits based on approvals.

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©MCX 2014. All rights reserved.

Content by: MCX Research & Planning

Designed by: Department of Corporate Communications, MCX

Please send your feedback to: [email protected]

Corporate address: Exchange Square, Chakala, Andheri (East), Mumbai - 400 093, India, Tel. No. 91-22-6731 8888,

CIN: L51909MH2002PLC135594, [email protected], www.mcxindia.com

INTERVIEW WITH MR. DEVENDRA SURANA, MD, BHAGYANAGAR INDIA LTD.

Can you briefly explain your business operations?

Do you use MCX? If so, kindly explain.

In your experience, how closely does MCX track LME?

Bhagyanagar India Limited (BIL) is primarily an auto component manufacturer that also caters to the electrical industry. Our

principal raw material, copper, accounts for about 70 - 75 per cent of the costs. Hence, it is strategic for us to keep an eye on

the copper price. We import copper on LME price basis.

Yes, we do. Since we are a listed company we need to report quarterly results. High price fluctuations in copper in the past

used to result in high variations in the inventory valuation, thereby affecting quarter-on-quarter profitability. As a business

requirement, we hold large quantities of copper to be used in various stages of manufacturing, which is usually around

400MT. Therefore, it is imperative that we hedge price exposures in our inventory holding and desensitise our P&L to the

fluctuations in copper price. This has been the primary reason behind our decision to use the MCX platform. We use MCX

copper futures contract to hedge (by selling futures contract) 60 - 70 per cent of our inventory exposures at all time.

I believe there is a high degree of correlation between these two markets. I am also very happy to see the liquidity and depth

of MCX copper contracts increasing day-by-day. Earlier, we use to see a divergence between MCX and LME prices around the

settlement time (around 5 pm – 5:30 pm) every day. Of late, these divergences in prices have disappeared. Lastly, for us, MCX

futures contracts priced in INR, is not only able to address the price fluctuation risk in copper but also the risk associated with

the fluctuation in currency.

World Refined Copper Production & Consumption Global Mine Production (’000 Tonnes)

Source: US Geological Survey

Country 2012 2013e

Chile 5,430 5,700

China 1,630 1,650

Peru 1,300 13,00

USA 1,170 1,220

Austrelia 958 990

Russia 883 930

Congo (Kinshasa) 600 900

Zambia 690 830

Canada 579 630

Mexico 440 480

Kazakhstan 424 440

Poland 427 430

Indonesia 360 380

Other Countries 2,000 2,000

World Total (Rounded) 16,900 17,900

0

2000

4000

6000

8000

10000

16,000

17,000

18,000

19,000

20,000

21,000

22,000

2008 2009 2010 2011 2012 2013

P r i c e ( U S $ / T o n n e )

P r o d u c t i o n & C o n s u m p t i o n ( ' 0 0 0 T o n n e s )

Production Consumption LME Avg Price (US$/Tonne)

World Refined Copper Production - 2014 (Forecasted) World Refined Copper Consumption - 2014 (Forecasted)

Source: International Copper Study Group ( ICSG)

Source: MCX CommNews

ChinaChileJapanUSARussian Fed.GermanyIndiaKorean Rep.PolandZambia

AustraliaMexicoSpainBelgiumPeruOthers

Source: ICSG

30.0%

13.3%

6.8%5.3%4.0%

3.1%

3.2%

2.9%

2.5%

3.3%

2.2%2.0%2.0%

1.8%1.5%

16.2% ChinaUSAGermanyJapanKorean Rep.Russian Fed.IndiaItalyTaiwanBrazilTurkeySpainMexicoBelgiumOthers

Source: ICSG

41.8%

9.0%6.0%4.6%

3.8%

3.1%3.3%

2.9%

2.0%2.1%2.1%1.8%

1.5%1.3%

14.9%

COPPER Brochure

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