Mumbai: Crude oil forms the basis of global energy markets, and is a trendsetter for energy products as a whole. In today’s competitive and ever changing business environment, maintaining a steady market share for energy intensive companies has become even more challenging due to constant fluctuation in crude oil prices caused by the changes in global demand and supply dynamics.
Sharp movements in crude oil prices over the last few months has resulted in an increased emphasis on price risk management activities. One such company which has resorted to hedge its price risk through derivatives trading on Multi Commodity Exchange of India (MCX) is Empire Industries Ltd.
Empire Industries Limited has diverse businesses covering the areas of Machine Tools, Industrial Equipment, Vending, Foods, Real Estate and Glass Containers for Pharmaceuticals.
The company consumes natural gas for their glass plants. Their Natural Gas procurement price is linked to Low Sulphur Heavy Stock (LSHS) price, a by-product of crude oil. Fluctuation in crude oil prices often leads to volatility in LSHS prices in turn leading to movement in natural gas prices. This movement hits the bottom-line of the company, squeezing business margins. As the natural gas price is linked with crude oil price, the company has decided to use the MCX crude oil and crude oil mini contracts which will help them to de-risk their business and ensure stable operating margins.
According to Mr. G.K. Sarda, Sr. Vice President, Empire Industries Ltd., “High volatility in international crude oil prices is a major challenge faced by our company, therefore by using the MCX crude oil and crude oil mini contracts, which have a strong correlation with international crude oil prices, we can now effectively manage our price exposures, thereby enabling the company to safeguard its business margins.”
Mr. Deepak Mehta, Head – Energy, MCX, said, “I am happy to note that more and more corporates are coming under the ambit of commodity exchanges to manage their price risks. Hedging price risk of internationally price linked commodities such as crude oil on MCX also protects the market players from currency price risk as the commodities on MCX are traded in Indian Rupees. Companies like Empire Industries coming to hedge their price risk on MCX platform speaks of the faith corporates have in our platform.”
The average daily volume of crude oil futures traded on MCX during the period, Jan, 2016 – November, 2016 was about 24.20 million barrels, providing considerable depth for more efficient price discovery.