MCX Reduces Mentha Oil Trading Lot Size – Welcome Move for Industry Persons

The contract specifications have been modified by the MCX in terms of reduction in the lot size from 6 drums to 2 drums, with effect from June 1^st. This implies that trading can be done with a lower margin amount, June onwards. This also implies that the delivery unit for contracts expiring July onwards will be 2 drums only. Delivery unit is the minimum quantity fixed by the exchange for delivering a particular commodity by the contract seller to a contract buyer, after expiry of the futures contract. The futures contract has a pre-determined date of expiry in a particular month.

It must be noted that the exchanges specify the conditions of delivery for the contracts they cover. The exchange designates warehouse and delivery locations for many agricultural commodities including mentha oil. With a physical delivery, the underlying asset of futures contract (here the asset is Mentha Oil) is physically delivered on a predetermined delivery date.  

This revision will be seen as a welcome move by the market participants as chances of an impressive rise in trade participation in the Mentha oil derivatives has improved now. The delivery unit or the lot size was increased to 6 drums last year and market talks had clearly indicated trade volumes had dried up mainly because of this reason. Already the pandemic problems were increasing last year due to which sentiments were dampened. This affected the volumes further.  

Mentha is also known as Japanese Mint because the native place of Mentha is Japan. The crop’s cultivation began in Argentina, Brazil and China, after Japan and it started in India thereafter. The oil processed from the crop and its constituents are commercially used in food, pharmaceutical and cosmetics industries. Menthol produced from mentha oil, is used as raw material in Toothpaste, Toothpowder, chewing tobacco, confectionary, mouth, fresheners, Analgesic balms, Cough drops, as perfumes, Chewing gums & Candies, tobacco Industry. It may be noted that nearly 40% of the total mentha oil consumption takes place in the tobacco industry, followed by pharmacy and confectionary industry.  

On the global front, India remains in top position in terms of global mentha oil production and exports. Out of total mentha oil produced, nearly 73% is contributed by India, followed by China (18%) and others (7%). India’s usage comprises around 40 of world’s consumption, followed by China, Europe and USA. Consumption of natural menthol has increased significantly in India over in last two decades, mainly due to steady industrial growth in India, coupled with increasing consumption of tobacco products. The main importers are China, Argentina, Brazil, US, France, Japan, UK etc. China mostly buys only mentha oil but other countries also import the commodity in powder and crystal form. India continues to be the leading producer of mentha oil having a share of 80-85%. Other major producing countries are China, Brazil, US and Japan. 

India is the largest producer and exporter of mentha oil and its derivatives. The production this year is expected near 55000 tonnes according to trade sources. Last year, the production was around 52000/53000 tonnes. India annually exports 70 per cent of the domestic production. Mentha Oil is exported to over 114 countries. As per reports India had exported the oil worth 199.84 million dollars in the year 2020-2021 (Apr-Nov period). The total volume of export in 2020-2021 (Apr-Nov) was around 12,600 metric tonnes. 

In India, the leading producing states in India are UP and Bihar. Himachal Pradesh, Jammu and Punjab also contribute in production but in low quantity. Other producing areas are Jammu, Punjab and Himachal Pradesh.  Important markets Indian are in UP, namely Chandausi, Sambhal and Barabanki. Mentha oil is brought in trading centres in distilled form by farmers/producers and sold to commission agents. Rise in the crop prices, as well as establishment of the mentha oil processing centres have encouraged farmers to produce more of the mentha crop in recent years. Uttar Pradesh is the largest producing state in the country, contributing nearly 80-90% of the total production, followed by Punjab, Haryana, Bihar and Himachal Pradesh.  

Largest producing nations are India, China, Brazil, US and Japan while leading consumers are India, China, Europe and USA. Major Trading centers UP is the largest producing state in India, which has markets in Chandausi, Barabanki and Sambhal. Mentha Oil has experienced the golden age for Mint industry, in the last Four FY (2016-17 to 2019-20). Prices have appreciated significantly in these years, generating decent returns for the processing units, stockists, and Indian farmers.  

The spot offers in Chandausi market are currently seen near Rs.1055-1060/kgs which is significantly cheaper based on the historic trends. At present the future market is range bound but once the lockdown and border trade restrictions are lifted, trade volumes will pick up thus raising the possibility of a respectable price appreciation in the longer run. 

The June contract had closed near Rs.930/kgs on Friday and charts indicate that the contract may not sustain below 850/875 levels till its expiry. Mentha oil prices are often volatile. In the last few years, India has emerged as an export hub for mentha oil and its derivatives, exposing exporters to high price volatility. Once the liquidity returns to the futures contract, the value chain participants will be able to hedge this price risk on the MCX platform once again.