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London became the global hub of gold trading by the end of the 17th century. Trading necessitated creation of gold vaults, which were duly approved by the Bank of England.
These vaults not only secured gold bars safely, but Bank of London also came up with London Good delivery List to recognise and accept gold bars produced by those gold refiners who were part of the good delivery list.
Gold bars produced by companies belonging to the good delivery list ensured that gold bars of assured quality standard were traded, thereby giving confidence to scores buyers and sellers about the quality of underlying gold.
Since then, the concept of good delivery list/standard has remained central to organised commodity trading markets including commodity derivatives exchanges.
With time, almost all commodity markets/exchanges such as LME (London Metal Exchange), CME, COMEX, NYMEX of USA and SHFE(Shanghai Futures Exchange) etc have developed their good delivery list/standard to meet the needs of commodity buyers and sellers.
In case of India, since their inception in 2003, Indian commodity exchanges have done several commendable jobs such as offering world class IT-enabled trading platforms, facilitating seamless trade clearing and margining system, developing warehouses and quality assessment systems, educating commodity producers, consumers, and other value chain partners on ways to mitigate price risk by using exchange traded derivatives contracts.
Indian commodity exchanges exclusively depended on LME for setting delivery standards for base metals, i.e, copper, aluminium, nickel, zinc and lead traded at Indian commodity exchanges.
This restricted many Indian companies’ capacity to use domestic exchange platforms for delivery of the underlying base metal commodities as only few Indian companies could be empanelled by LME as LME empanelment process was time consuming, expensive and even at times restrictive.
Adopting BIS Standards
In this context, in 2020 a significant step was undertaken by Indian commodities exchanges. Coinciding with Government of India’s initiative of Atmanirbhar Bharat (Self-reliant India), MCX created India Good Delivery Standards (IGDS) by adopting the standards set by Bureau of Indian Standards (BIS).
Based on the IGDS, Indian Commodity Exchanges, specifically MCX has empanelled several major secondary lead recyclers as part of its Good Delivery Standard for Lead during 2020 to 2024. The major companies to have been empanelled by MCX are Pilot industries, Gravita India, Eswari Global, Jayachandra Alloys and Ardee Industries. Lead produced at Bhiwadi Plant of Pilot Industries Ltd. and Chittoor Plant of Gravita India Ltd. were the first ones to be empaneled by MCX on February 17, 2022.
It is important to note that, though India remains a marginal player in primary production of Lead, India is the world’s biggest importer of Lead scrap and has about 673 registered lead recyclers.
In this context, it is also worthwhile to highlight that three Indian primary producers of lead have been empaneled by LME since 2007. These are Hindustan Zinc Ltd, Jain Resource Recycling Private Ltd. and Pondy Oxides and Chemicals Ltd. being empanelled by LME in 2007, 2019 and 2022 respectively. In addition, Hindustan Zinc Ltd. is also emplaned with CME of USA. Of course, no Indian company is emplaned with SHFE.
It is also worthwhile to note that MCX Lead empanelment parameters differ from LME and CME in one significant way. While both LME and CME required a minimum purity of 99.97 per cent, MCX requires the delivered lead to be of higher purity (99.98 per cent). In addition, MCX contract lot size is 5 MT, as compared to 25 MT at LME and CME.
Empaneling domestic recyclers
Empanelment of domestic recyclers seems to bring some additional benefit to the Indian domestic Lead market. Since the empanelment, during 2019 to 2024, 51000 tons of Lead has been delivered through MCX platform, with highest quantity of 2725 tons delivered in March 2022 only.
In addition, the percentage of delivery in a given month to the total volume traded for that month is also indicating a healthy increase post 2022 coinciding with post enplanement period.
Of course, without knowing the identity of the companies which are actually delivering Lead at MCX platform, one cannot conclusively conclude that empanelment resulted in higher delivery by domestic refiners as compared to domestic primary producers empanelled by LME.
It may, however, be noted that delivery of underlying commodity should not be a criterion for measuring success of a commodity derivatives exchange.
Commodity exchanges are platform for price risk management and price discovery. Quantum of physical delivery as part of the futures contract settlement should not be considered as parameter to measure success of a commodity exchange.
However, considering the fact that MCX has it invested heavily in empanelling expansive warehouses (at Thane, Chennai, Palwal, Kolkata and Raipur) and making their goods eligible for good delivery, hence increased delivery of Lead adds significance.
In addition to analysing the delivery quantity, comparison of simple correlation between the LME cash price of Lead and MCX spot price for Lead before and after the empanelment indicates a significant difference.
The correlation between Lead spot prices of MCX and LME was 84% before empanelment, which reduced to 58 per cent after empanelment.
This indicates that with empanelment of domestic Lead refiners, the impact of LME prices on domestic prices has reduced. In other words, price discovery in Indian markets has become more in sync with domestic demand and supply dynamics, thus leading to “India price of Lead”.
Interesting aspects
Survey of empanelled companies’ personnel also indicated some interesting aspects of empanelment. Some of these are
- MCX empanelment process requires companies to follow occupational and safety norms, quality, environment and pollution control norms, SOP/work instructions, strapping (aesthetics) of bundling, etc. Hence, being empaneled has been beneficial to empanelled companies.
- Currently, Indian Lead spot market is governed by Local SMS price. Interestingly, even knowledgeable individuals with long experience in Lead market are not clear about who decides local SMS price and how the same is arrived at on a daily basis. Local SMS prices have no scientific basis and varies across different regional spot markets of India. Considering the opaqueness of Local SMS price on one hand, and LME prices not reflecting Indian Lead market condition on the other hand, the prices discovered in a transparent manner have potential to emerge as a reference price for domestic spot market transactions.
- Empaneled companies have started using MCX as the market of last resort and use the platform for better inventory management. As per one respondent, “Whenever there is a shortage of orders, or we have excess inventory, we buy or sell at MCX platform, thereby we always have a customer at all prices”. Another respondent echoed the same view as “Whenever MCX prices are better than the domestic market prices, we take deliveries from MCX platform. Arbitrage between prices play a major role here”.
- LME and CME have empanelled more brands with 99.97% purity, though 99.97% purity level is not preferred by OEMs. MCX’s choice of 99.98% purity signals quality of MCX product and also preference by OEMS.
Organising domestic market
It is important to also highlight that large Lead producers from India who are already part of LME/CME good delivery list will in any case hedge price risk at those global exchanges.
Listing and trading Lead contracts as well as empaneling domestic refiners and developing a different quality standard by MCX is a step towards organising domestic Lead market with many small and medium scale players. These domestic refiners, consumers and value chain partners who may not be operating in global scale and size, but have significant hedging requirements, can benefit from the new empanelment initiatives taken by MCX.
Post empanelment not only deliveries in domestic exchanges have improved, there seems emergence of India price of Lead, more realistically reflecting domestic supply-demand conditions and quality requirements. Empanelment of domestic Lead refiners is a small yet a significant effort towards achieving Atmanirbhar Bharat, in that Indian Lead market ecosystem derives its India price rather than exclusively depending on LME price.
Rajib is Professor & Director, BIMTECH, and Barai, Associate Professor, VGSoM, IIT Kharagpur
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Published on January 25, 2025
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