aluminium mcx From basics to Contract Specifications Mastering the Art of Trading

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Copper is a base metal, which is highly traded on MCX. Unlike gold and silver, it does not qualify as precious.

The traded value of copper on MCX is estimated to be around INR 2,050 crores over an average of 55,000 lots, which demonstrates the high liquidity of the contract, similar to that of crude oil and gold.

Copper is definitely an interesting metal, ranking third in terms of global consumption after steel and aluminium. Its price remains closely tied to economics, yet its electrical conductivity makes it the ideal choice for wiring. Surprisingly, even Tesla’s hybrid car utilises a copper motor (rather than the standard permanent magnet motor).

Of course, apart from this, copper finds its application in a whole host of other things such as –

o   Building and construction

o   Copper alloy moulds

o   Electrical and electronics

o   Plumbing solutions

o   Industrial uses

o   Telecom

o   Railways

The use of copper follows a similar pattern to the consumption of aluminium. Taking a quick look at this observation –

In 2015, the global need for refined copper was 24 million tons; of this, China and Japan had combined to account for half. In view of the surplus supply – evident by the rightmost two bars – along with the commodity glut that has recently come into effect, prices have seen a drastic decline in recent years.

Knowing the basics is advisable, but like with any other item, charts are the best bet when trading copper. Therefore, let’s concentrate on its contract specifications. Both aluminium and copper offer two contracts – a large version and a mini version. Now, I will outline the characteristics of the larger copper contract.

o   Price Quote – Per kilogram

o   Lot size – 1 metric ton

o   Tick size – Rs.0.05

o   P&L per tick – Rs.0.05 * 1000 = Rs.50/-

o   Expiry –Last day of the month

o   Delivery units – 10 MT

Here is the snap quote of copper, expiring in Feb 2017 –

The price as seen here is Rs.389.1 per Kg. The contract value, therefore, would be –

Lot size * price

= 1000 * 389.1

= Rs.389,100/-

The NRML margin is as shown below –

Rs.30,544/-, which works out to 7.8%. MIS margin is half this amount.

The Copper Mini contract has a lesser lot size, therefore lesser P&L per tick, and lesser margins.

o   Price Quote – Per kilogram

o   Lot size – 250 Kgs

o   Tick size – Rs.0.05

o   P&L per tick – Rs.0.05 * 250 = Rs.12.5/-

o   Expiry –Last day of the month

o   Delivery units – 10 MT

It’d be wise to have a look into technical analysis if you’re trading in copper, or any type of commodity. They provide solid results on commodities that are highly liquid, such as copper. Therefore, it’s key to get an understanding of the agreement specifics initially.

Onwards to Aluminium!

 – Aluminium Basics

Our goal is to comprehend the basics of this commodity. As most of us are looking for a short-term investment, we will focus on the cost dynamics rather than the fundamentals. I’ll therefore stay on top of the subject, presenting bullet points for smooth reading. After this, we’ll take a look into the agreement essentials.

When one thinks of Aluminium, they may not immediately consider its uses beyond food wrapping. However, the metal has many applications and can be used for a wide range of purposes.

Here are a few things you need to know (have collected this information from various online sources) –

  1.     Aluminium is one of the most plentiful elements, with approximately 8% of the earth’s crust comprising it. This puts it in third place, after oxygen and silicon, in terms of abundance. Supply is not a problem.
  2.     Aluminium’s ability to resist corrosion makes it a highly desirable metal.
  3.     The production of aluminum is a highly energy-intensive process, requiring 17.4 megawatt-hours to produce one metric ton. In other words, it takes a great deal of power!

The power and fuel costs for Hindalco (the major producer of Aluminium) make up roughly 10% of the expenditure. It’s worth noting that although this prominent manufacturer operates its own captive power units, the amount used exceeded what it produced in-house.

  1.     Aluminium can be recycled with minimal energy use, using only 5% the amount of power that would ordinarily be required.
  2.     Aluminium is used in many products, from the commonplace smartphone to a massive Boeing 747. In fact, a single jumbo jet uses up an astounding 70,000 kilograms of aluminium!
  3.     Aluminium has a range of applications, such as in the automotive, building and construction, defence, electrical, electronic, pharmaceutical and white goods industries.
  4.     Aluminium is a metal that is in plentiful supply and has high demand.
  5. The price of aluminium traded on MCX is closely linked to the international rate found on the London Metal Exchange (LME).

In fact, here is a snapshot which gives you the trends in production, supply, and the average price of aluminium on LME –

This chart is captivating; it can indeed be broken down into sections, from which some basic trading principles can be derived. Let’s take a closer look –

  1.     In 2015, 56 million tonnes of aluminium were produced worldwide – a 4% increase on the previous year.
  2.     The global production nets a CAGR of 6% over the last 8 years.
  3.     This indicates that the global production and demand are in balance, implying no disruptions to supply and demand.
  4.     In fact, demand and supply have remained more or less stable over the years.
  5.     The price of aluminium has drastically decreased over the past few years, now averaging at $1,500/- per ton. This is a significant decrease from its former peak at $2,500/- per ton. It has become a topic of discussion lately because of the global commodity oversupply and the influence that Chinese demand has on global pricing.
  6. In contrast to global demand, Indian demand for aluminium is stronger at 2 million tonnes according to Hindalco’s annual report. Domestic production meets much of this demand, with imports making up the difference.

This should give you a head start with the basics of Aluminium. Personally, due to my quick turnover times, I’m more inclined to trade based off technical analysis rather than anything else.

Let us now discuss the contract specifications for trading aluminium on MCX, to further gain insight into its practicality.

– Aluminium contract specifications

You might’ve figured it out already – there are two main aluminium contracts to trade on MCX. One is the big aluminium contract, and the other being the aluminium mini. Obviously, they differ in lot size and thus, their total value. Let’s start off by looking at the big aluminium contract first.

The average traded value of big aluminium per day is roughly INR 375 Cr. There are days when the volume increases to just over INR 500 Cr, but it does not reach the levels of other commodities such as gold or crude oil.

The contract details are as follows –

o   Price Quote – Per kilogram

o   Lot size – 5 metric ton

You may have come to the conclusion that this is a massive agreement. A metric ton totals 1,000 kilograms; thus, 5MT adds up to 5,000 kgs. As the cost is given per kilogram and the total quantity is 5,000 kgs, each tick will lead to Rs.5000/- in P&L presuming the tick measures Rs.1/-. Being such a sizable amount, especially for retail trading purposes, MCX has brought down the tick size to its lowest value which is Rs.0.05.

o   Tick size – Rs.0.05

o   P&L per tick – Rs.0.05 * 5000 = Rs.250/-

o   Expiry –Last day of the month

o   Delivery units – 10 MT

Let’s take a deeper look at this information. Aluminium on MCX is measured and quoted by the kilogram. Below, you can observe the market depth of aluminium depicted in an image.

As you can see, the aluminium expiring in Dec 2016 is trading at Rs.118.4/- per kg/

The lot size is 5 MT (5000 kgs), which means to say that if you want to buy (or go long) on Aluminium, the value of such a contract will be –

Lot size * price quote

= 5000 * 118.4 (offer price to go long)

= Rs.592,000/-

The price movement in aluminium is 0.05, which means, if aluminium moves from 118.4 to 118.45, the profit will be –

118.45 – 118.4

=0.05

=0.05*5000

=Rs.250/-

What about the margins? Have a look at the following snapshot

The NRML margin charged is Rs.33,719/- which works out to 5.6%. However, MIS margin is almost half of the NRML margin.

Here are the contact details of Aluminium mini –

o   Price Quote – Per kilogram

o   Lot size – 1 metric ton

o   Tick size – Rs.0.05

o   P&L per tick – Rs.0.05 * 1000 = Rs.50/-

o   Expiry –Last day of the month

o   Delivery units – 10 MT

The contract value is quite small –

= 1000 * 118.4

=Rs.118,400/-

NRML margin is Rs.6,779/-,, which is 5.7%. MIS margin is much lesser at Rs.3,389 or just about 2.8% of the contract value.

P&L per tick is Rs.50/-, a value which is much ‘deal-able’ while trading.

This information should be adequate to begin trading with Aluminium. You need to analyze the chart, create an opinion, and make trades based on the graph’s pattern. If you’re interested in having a thorough understanding of Aluminium, I’d suggest exploring www.world-aluminium.org and www.aluminium.org.

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