Raw materials: Asia and the global commodities boom

As the world’s socio-economic make-up undergoes dramatic change, so commodity trading across Asia and the Gulf region increases. Vision looks at the factors that have given rise to this boom and the financial exchanges that are helping service it

Asia, home to over 60 per cent of the world’s population and with a decisive lead as importers and consumers, has recently become the world’s commodities trading hub – with new markets and derivatives exchanges springing up from Dubai to Hong Kong to service the trend.

It is 11 years since Asia marked the start of the latest global commodities boom by outstripping Europe in listed commodities futures and options trading. In 2001, 109 million total contracts traded in Asia to only 89 million in Europe. By 2010, Asia had cornered more than half the world’s exchange-based commodities trading. But experts say the region’s commodities markets remain underdeveloped – implying teething problems and room for growth.

Given the increasing demand for global liquidity, a structured platform that facilitates financiers to lend with confidence in an environment where risks can be identified and mitigated is essential to ensuring the continued flow of global trade

Paul Boots , Director, DMCC Tradeflow

Geoff Howie, Markets Strategist at MF Global Singapore, has remarked that exchange-based commodities trading is a relatively new phenomenon in Asia. Elsewhere, Tom McMahon, a former Director of Nymex Asia and the first CEO of the not quite two-year-old Singapore Mercantile Exchange (SMX), has noted that most Asian commodities exchanges serve domestic needs.

Emerging economies

In China and India, which rank as Asia’s two most populous nations and the region’s biggest emerging economies, the sheer volume of domestic trading has trumped bans on foreign market participants to propel fledgling local commodities exchanges to the top of global rankings.

The Shanghai Futures Exchange has started to dominate global metals markets with exceptionally active trading in raw minerals such as zinc, and refined metal products such as steel rebar and copper cathodes. Ranked by number of contracts traded, the Shanghai Commodities Exchange was the world’s largest in 2010. Even so, with China and India aware of the potentially destabilising effects of large foreign speculative inflows on local markets, moves to broaden access are far from imminent.

Meanwhile, India’s Forward Markets Commission has been studying a proposal to allow foreign commodities traders to act as brokers, but the regulator has not yet reached a decision on the issue.

Singapore, however, long renowned as a physical trading hub and a centre for over-the-counter trading in energy derivatives, has recently moved smartly to get in on exchange-based futures trading action.

After becoming Chief Executive of the Singapore Exchange in December 2009, Magnus Bocker moved quickly to expand trading. In July 2010, the Singapore Exchange struck a deal with the London Metal Exchange to list versions of the LME’s monthly metal future contracts, starting with copper and zinc, to be cash-settled against LME prices.

International trading

Not to be outdone, the Singapore Mercantile Exchange, operated by India’s Financial Technologies, went live on August 31, 2010. Seeking to develop a pan-Asian market for internationally traded commodities, it initially offered futures contracts in euro-denominated Brent crude oil and US dollar-denominated West Texas Intermediate crude, as well as gold futures and currency derivatives.

The Hong Kong Mercantile Exchange (HKMEx), an electronic platform launched in May 2011, began with a dollar-denominated gold contract and quickly added a similar silver contract. Renminbi-denominated gold and other precious metals futures are expected to debut soon, to be followed by renminbi contracts in copper and other base metals. The exchange is also developing futures contracts in energy and agricultural products, and commodity indices.

“HKMEx, backed by Chinese and Russian investors, was founded to connect mainland China’s fast-growing commodities market to the rest of the world with products adhering to international standards but tailored to the risk-management needs of local and regional market participants,” says Exchange Chairman Barry Cheung.

In West Asia, at the other end of the Silk Road, the Dubai Multi-Commodities Centre (DMCC), a government-owned free zone authority established in 2002 in the new mixed-use district of Jumeirah Lake Towers, runs a regional hub for physical trading in gold, diamonds, and tea, among other commodities.

Increased demand

On February 14, 2012, DMCC launched Tradeflow, an electronic commodities trading platform, as a successor to the Global Multi Commodities Receipt platform it introduced in 2004. The platform allows owners of goods stored in rated UAE warehouses to request warehouse keepers to issue warrants representing ownership of their goods. Those warrants can be used to pledge beneficial ownership or transfer title of the stored goods to financiers as collateral for loans. “Given the increasing demand for global liquidity, a structured platform that facilitates financiers to lend with confidence in an environment where risks can be identified, and mitigated, is essential to ensuring the continued flow of global trade,” explains Paul Boots, Director, DMCC Tradeflow.

The trading-platform announcement followed another in late January, when Sulayem said the DMCC was planning by June to add spot gold and gold exchange-traded funds to the gold futures contracts it launched in 2005.

Jeffrey Rhodes, Global Head of Precious Metals trading and CEO of Dubai-based brokerage INTL Commodities, and others, says gold could rally further if investors continue to treat it as the best available safe haven from global economic and geopolitical turmoil.