How the Multi Commodity Exchange (MCX) is Shaping India’s Commodity Market

Though not as popular as the stock market, the Indian commodity market is experiencing significant growth. The commodity market has the concept of dedicated exchanges. These exchanges play an essential role in price determination and substantially impact the primary sector of the Indian economy. One prominent name in the Indian Commodity Market is the MCX. 

What is MCX?

MCX-Multi Commodity Exchange of India Limited is an advanced commodity derivatives exchange that facilitates online trading and provides a risk management and price discovery platform. Founded in November 2003, it adheres to the regulatory guidelines of the SEBI. MCX has a remarkable market share in India, processing about 60% of all futures commodity trades.

MCX is India’s first Exchange to initiate commodity options and futures contracts on bullion, energy indices, and base metals. It offers trading in commodity derivative contracts across varied segments, including bullion, energy, industrial metals, agricultural commodities, and indices derived from these contracts. MCX provides commodity value chain participants with neutral, safe, and transparent trade mechanisms, established quality standards, and trade regulations that conform to the regulatory framework. 

Commodities Traded on MCX

The MCX commands India’s commodity futures trading a substantial 60% market share. It offers futures contracts across various categories:

• Base Metals: Copper, Lead,  Zinc, Aluminum, and Nickel.
• Energy: Natural Gas and Crude Oil.
• Bullion: Gold, Gold Mini, Gold Guinea, Gold Petal, Silver, Silver Mini, Silver Micro.
• Agricultural Commodities: Cotton, Mentha Oil, Crude Palm Oil and Kapas.

Factors Affecting Commodity Prices on MCX

Several key factors influence commodity prices on MCX:

1. Supply and Demand

Supply and demand are significant factors affecting MCX’s commodity prices. Various factors, including changing consumption patterns, economic growth, or weather, impact supply and demand. When supply surpasses demand, prices tend to fall, and vice versa.

2. Geopolitical Events

Geopolitical incidents such as political instability, war, and trade policies can significantly impact commodity prices. For example, political unrest in major commodity-producing regions can reduce or eliminate supply chains and lead to price fluctuations. 

3. Technological Advancements

Advancements in technology can affect production processes and commodity demand. Improved technologies can influence commodity prices by improving extraction or production processes, increasing returns and lowering marginal costs. Conversely, it might increase demand for a few commodities, raising prices. 

4. Currency Fluctuations

Currency fluctuations can have a great impact on commodity prices. When the value of a currency decreases, it becomes more expensive for buyers to purchase commodities denominated in that currency. For example, dollar fluctuations can influence commodity prices in U.S. dollars. As the dollar strengthens, commodities become more expensive for buyers using other currencies, decreasing demand and lowering prices.

5. Market Speculation

Traders’ speculation can cause commodity prices to fluctuate. If speculators believe a commodity’s price will rise, their increased buying can boost its current price. Investors and traders can drive prices up or down by betting on future increases or decreases. 

Also Read: What is Commodity Market: Types, Benefits and How it Works

Advantages of Commodity Trading on MCX

1. Diversification

Commodities can be a game-changer in diversifying your portfolio. Generally, commodities have a low or negative correlation to other asset classes, such as equities and bonds. Due to any geo-political event, investors may feel anxious and withdraw their money from bonds or stocks and invest it in safe commodities like gold or silver. Conversely, investors might leave commodities and move to equities if the economy performs well and companies display a sharp profits jump. Therefore, commodities in your portfolio can help you limit your risks to maximise profits.

2. Hedging

Many investors use commodities to hedge against price swings. Commodities such as maize, sugar, iron, and copper are essential raw materials for many businesses. In the commodities futures market, investors hold an opposite position regarding hedging against price swings. Commodities can also be used to hedge against particular events. For example, an oil shock may destroy equities markets but will cause crude oil prices to rise.

3. Inflation Protection

When inflation rises, stocks and bonds generally witness a fall since inflation often dries up liquidity, reducing purchasing power. On the other hand, a rise in inflation means a boost in commodity prices. So, if you are holding a commodity whose price is increases, your portfolio value will also increase. This ensures that your purchasing power remains unaffected despite the high inflation rate.

4. Liquidity

Many people link commodity trading with the physical transportation of bulk commodities, which can be challenging to sell. However, online commodity investments are 100% liquid, and like stocks, you can sell them anytime, making them a better option than fixed deposits or real estate. Hence, commodity derivatives can be a safe investment when you want better control over your funds.

How To Trade on MCX?

To start commodity trading on the MCX, follow these steps:

• Select a broker: Choose a broker registered with the MCX and the required SEBI approvals.

• Complete KYC: Provide the required documents, such as a PAN card, Aadhaar, proof of income. and a passport-size photo. 

• Trading Account Activation: The broker will verify your documents and activate your trading account.

• Deposit funds: Deposit the required trading capital and margin money into your account. 

• Choose a commodity: Choose a commodity you want to trade, such as copper, crude oil, gold, silver, sugar, or cotton. 

• Research the market: Before trading any commodity, analyse market conditions and research the commodity properly. 

• Place an order: You can use any online platform to buy or sell commodities. 

Conclusion

With the right strategy, trading in commodities can open up new avenues for you. Commodity trading is often considered more stable than equity stocks. MCX is the country’s most modern, high-tech and customer-friendly exchange. It has led to the introduction of many innovative trading products, catering to the needs of all significant trading communities nationwide. The platform offers different contracts depending on the commodity type being traded in the exchange.