Metals, energy fire up Indian commodity exchanges

MUMBAI (Reuters) - Surging trade in metals and energy has propped up Indian commodity exchanges despite a ban on farm futures, and volumes are set to grow even more as investors scramble for safe haven assets amid weakening financial markets.

But analysts warn that not all will benefit equally.

Buoyed by a rapid-fire approach to new contracts, sector leader the Multi Commodity Exchange (MCX) -- valued at $1.1 billion when Citigroup (C.N) and Merrill Lynch MER.N each bought 5 percent stakes in it last year -- is taking market share.

The runner-up National Commodity & Derivatives Exchange Ltd (NCDEX), in which Goldman Sachs (GS.N) and IntercontinentalExchange Inc (ICE.N) hold minority stakes, has watched its fortunes wither this year.

The exchange, which focused on agricultural commodities, saw trading volumes fall by a third after the government banned contracts for eight commodities, including its heavily traded wheat, soyoil and chick pea contracts.

Now NCDEX is set to begin quickly developing new contracts, a strategy that has helped the MCX weather setbacks like the ban on trade in agricultural products like wheat and rice, a proposed tax on trade in commodity futures and government reluctance to let financial institutions enter the market.

"We have rescheduled the time and speed of our launches," says Unupom Kausik, chief business officer of NCDEX, which has a 21 percent share of the market. The exchange aims to introduce four or five new contracts by the end of this year, he said.

Whether that helps it close the growing gap with the MCX remains to be seen, analysts and traders say.

"New contracts may help (gain volumes) to some extent," said Suresh Nair, head of commodities at MAPE ADMISI Commodities Pvt Ltd. "Every thing is a try-and-see-how-it-works."

LEADER

Since India first allowed commodities futures trade five years ago, MCX has grown to capture 75 percent of India's of the market, helping catapult founder Jignesh Shah to the Forbes' list of billionaires. Trading volumes have risen by 18 percent over the first half of this year.

Roaring trade in gold, silver and crude oil futures has rapidly emerged, aided this year by Indian investors following their global peers in shifting funds away from poor performing stock markets and toward booming commodities.

Hopes for a vibrant domestic market and an industry boom for global exchanges have lured a handful of investors in recent years, including NYSE Euronext (NYX.N), which has a 5 percent stake in MCX.

When Citi and Merrill invested in MCX, its implied value exceeded that of the 133-year-old Bombay Stock Exchange.

That outlook took a knock in February 2007, when the government banned trade in key staple foods in an effort to prevent surging global prices from stoking inflation.

But investors quickly switched to other contracts, with turnover at India's 22 bourses doubling to 2.38 trillion rupees ($56 billion) in the first half of July.

"Gold, silver and crude oil are the pillars of MCX's success," said Shailendra Kumar, head of the Commodity Research Group, which advises traders and investors.

The average weekly volumes for gold futures on the continuation charts MAUc1 are up 91 percent from January to July compared with a year ago.

"Strong networking with bullion traders has kept the precious metal contracts successful and first-mover advantage in gold and energy also helped," Kumar said.

STOCK MARKET FALL

Analysts say commodity futures have also gained from the fall of the Indian share market, which is down nearly 30 percent this year as it retreats from a spectacular five-year bull run.

Joseph Massey, managing director and chief executive of MCX, said tumbling share prices had helped increase liquidity in gold.

Many top equity brokerages, which have been running full-fledged commodity trading arms for several years, are looking to profit from the growing investor interest since the commodity exchanges were launched five years ago.

And many expect investors to continue shifting a small slice of their portfolios into commodities, notwithstanding the steep sell-off in July that saw major commodity indices endure their biggest one-month fall in nearly three decades. That correction followed the biggest quarterly gain in 35 years.

"The trend in commodity markets is quite clear -- that there is money to be made in commodities," said T. Gnanasekar, director of Commtrendz Research, a local hedge fund. "People have to diversify their portfolios."

Even with uncertainties about the government's attitude to commodities trade and the rapid emergence of a dominant market leader in MCX, more competitors are lining up to join the fray.

State-run metals and grain trader MMTC Ltd (MMTC.BO) and leading brokerage Indiabulls Financial Services' (IBUL.BO) last month obtained government approval to jointly set up a new commodity exchange.

"The markets may grow modestly due to pending policy decisions, but new commodities may help to cater to new sectors," said Massey, the chief executive of MCX.

(Editing by Clarence Fernandez)