Its authorised dealer Standard Chartered Bank will help the company to kick off its hedging operations by early January.

"We have cleared the application of Birla Copper," said a top RBI source.

Birla Copper is the first domestic corporate to plunge into hedging commodity-related risks on global commodity exchanges, permitted by the RBI on September 28. There are several other companies which may follow Birla Copper's footsteps.

Regarding actual hedging on the floor of the LME, the company is understood to have shortlisted few ring dealers/brokers through whom it will hedge its mismatch between periodic copper purchases and sales. The name of the ring dealer will be finalised later this week.

The hedging permission sought by Birla Copper is for an "offset hedge", which means it will be allowed to take an `equaland opposite' hedging position on the LME to offset the open position at any given time. The risk against fluctuating forex rates could well be covered in the forex market.

Birla Copper, which began commercial production in June this year, has an installed capacity of 1,00,000 tonnes per annum. Like other copper producers in the country, barring Hindustan Copper, it has to import copper concentrate for its operations. This leaves it open to price-risks in the intervening period between the purchase of copper concentrate and the sale of its end-products.

Birla Copper is safeguarding itself indirectly by contracting around 80 per cent of its needs with LME-linked suppliers at a pre-determined LME formula. Price-risks are now partially borne by suppliers.

INSIGHT
RBI strikes a positive cord

It must be recognised that by allowing a domestic company to hedge its risks on an international commodity exchange, the Reserve Bank has sent out positive signals to industry. However, even in theabsence of such a permission, innovative companies like Sterlite Industries were effectively hedging themselves through other means. Players like Sterlite Industries and Birla Copper import copper concentrate, not finished copper. Unlike finished copper, whose rates are quoted on the exchanges, rates for copper concentrate (though largely based on LME copper prices) differ according to each consignment's mineral composition. Besides, as these producers need the concentrate on a regular basis, they generally directly enter into long-term contracts with mine-owners.

These contracts are structured in such a way that the interests of both the buyer and the seller are protected. Consider the following for instance. The domestic smelter needs two lakh tonnes of copper concentrate per year. It, therefore, enters into a contract with an overseas mine to supply its need for the next three years. The two parties would ensure that the price clause would read somewhat like "$xyz per tonne, x mama (months after themonth of arrival)". What this means is that the producer's raw-material price is the prevailing rate after the finished product is ready. Hence, the difference in price between then and the order date ceases to be a risk factor. The raw-material price is reflected in the finished product price, and thus, the metal converter makes its profits irrespective of interim price movements on the LME.