There would be at least 100 entities in the trade and manufacturing sectors that require expertise to manage their hedging requirements given the current competitive trend.

However, experts like ScotiaMocatta and others are finding it difficult to convince majority of them to undertake this new risk management tool. Hardly 5-7 of these entities would be seriously ready to put necessary systems in place (as required by the RBI) before taking plunge in the new world of hedging commodity-related risks on the global commodity exchanges.

"There has been both complacency and resistance from a cross section of Indian corporates in adopting hedging activities to safeguard themselvesagainst unforeseen risks," said ScotiaMocatta Associate Director (base metals) Vikram Dhavan. ScotiaMocatta is one of the few entities on the LME expanding its operations. ScotiaMocatta is part of The Bank of Nova Scotia. After acquiring the Mocatta group in December last from Standard Chartered Bank, ScotiaMocatta is a global leader in metals trading, including bullion metals, brokerage and finance with roots dating back to 1671.

"It's been difficult convincing some of the corporates whom we have been approaching to help them with their commodity-related risks".

However, says Dhavan, this initial resistance is slowly giving way to acceptance, but it will take at least two years before hedging activity is acceptable.

``We are currently training a couple of corporates that will enable them in setting up hedging desks to take advantage of the new policy changes,''he said.

In a relatively controlled economy there has been little need for domestic corporates to undertake hedging activities, for there washardly any risk to hedge. If undertaken, risk management, through hedging, was concentrated only on the foreign exchange front and that too largely by exporters and a handful of corporates. This too has been only after the partial convertibility of the Indian rupee in 1992. Majority of this hedging activity in forex has been directed to delay the inward remittances and gave additional amount of speculation to the forex trade.

"The concept and the need of commodity derivatives and commodity hedging was completely missing," Dhavan said. "Instead, there have been questions why could not the commodity prices be predicted like the stock prices and help corporates punt on the commodity exchanges.

As a result there is lack of understanding about hedging "some say it is hardly different from gambling and therefore, no need". However, the prime reason for not adopting the hedging activities is the absence of need for accountability to the shareholders in the form of predictable cashflow and relatively smootherprofit curve. "It was not unusual for the corporates to continue riding for years the volatile and uncertain profit curve, for no one, not even the shareholders, questioned the reasons for volatility in cashflow, profits and returns," Dhawan said.

``It is necessary that corporates take up hedging activities at the earliest. This is important, primarily because of the increasing level of global competition that puts tremendous pressure on the overall margins, which in turn leads to uncertainty on the profitability front.

In order to strengthen our operations here, we have been visiting India since the past couple of years", Dhavan said. With a full-fledged metals desk now set up in Mumbai, ScotiaMocatta is currently advising number of Indian corporates, both private and public sector, on their need to take up hedging activities.

On the falling number of LME members

Falling metal prices in the global markets, continued poor offtake, squeeze in trading spreads and the sharp declining volumes onthe London Metals Exchange are forcing many members to take a relook at their long association with this prestigious bourse.

Quite a few of the 17 metal exchange members are scaling down operations, while others are rolling down their shutters.

On whether the number will reduce to 10 in the coming year Currently, there are 14 members on the LME. Last month, two of its leading members, Merrill Lynch and Billiton Metals, were reported to have sharply reduced their operations in metals business. Earlier, Tiger Fund, the hedge fund linked to George Soros closed down after having posted massive losses in copper trading.