Saturday, June 04,
The futures market is seen playing catch up with the spot market and the gap between the two is narrowing down considerably. There are two ways in which this can happen, one the steel long futures prices go up and the physical prices remain stagnant. The second way will be that the physical prices correct back to the futures levels, which seems very unlikely because of the inherent costs involved in the physical markets.
Every one understands that futures markets are a reflection of the physical markets and physical markets look at the futures markets for cues. But only a select few in the market can take the advantage of the arbitrage opportunity that NCDEX offers. We saw that the futures market was trading at a discount to the spot market and taking delivery from the exchange was the smart choice. For instance there was a clear arbitrage opportunity for
Traders made the most of the opportunity by buying Ingot form the exchange and selling it in the spot market. This trend is clearly visible when we look at the stock levels with the exchange. Only a few months back NCDEX held 78,000MT of stock and today the stock levels have fallen down to 12,000MT.
What this arbitrage opportunity did was that it brought a whole new supplier to the market the exchange it self. On one hand the Ingot manufacturers were grappling with cost push and on the other hand the futures which were trading at discount meant that one can buy form the exchange at a deep discount and sell it to the rolling mills and make a killing in the other wise low margin trading business.
One can regard the present market as an imperfect market condition where arbitrage opportunity exists. But markets can not remain in an imperfect state and provide for such a huge profit margin to prevail till eternity. It has to stop and looking at the present day scenario it looks like that it will. Now the stocks at the exchange are at a very comfortable level and are not enough to influence the market in a big way.
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