In global commodity trading, Asia is where it’s
at. Not that all the trading activity has migrated to Asia
– far from it. Chicago, New York and London are still
big hubs for agricultural goods, precious and base metals and
oil and gas products.
But the Asian countries have taken a decisive lead as importers
and consumers of commodities – as measured by their
growth, if not yet total consumption. Longer term, that will
happen too. Asia has 60% of the world’s people,
and some of its biggest infrastructural needs.
And the trading is being drawn to that magnet. In listed
futures and options trading, 2001 was the year when Asia
outstripped Europe, by volume of contracts traded (see
graph at foot of this article).
At that time, the numbers were 109m contracts in Asia and 89m
in Europe. North American volume was 182m contracts.
For the next seven years, the North American market grew every
year, and stayed ahead of Asia. In 2009, North America
stumbled, with a 3% contraction to 679m contracts. But even
without that it would have been left far behind, as Asia
stormed from 664m to 960m.
In 2010 another milestone has been passed: Asia now accounts
for more than half of global commodity futures and options
trades. Its total for the first seven months of this year, 682m
contracts, was more than for the whole of 2008.
With tenfold growth in a decade, you might be forgiven for
thinking the Asian commodity derivatives markets had realised
their potential. Far from it, say market
Just the beginning
For despite the huge total volumes, many of Asia’s
commodity markets have underperformed their potential.
Virtually all the growth has come from China and India, leaving
a ring of markets on the Pacific seaboard, from Tokyo to
Singapore, that are still small compared to the markets of the
US and UK.
"Asia’s commodities markets have grown quickly but
still have a lot of development potential," believes Toby
Lawson, managing director of Newedge Asia in Hong
That assessment is echoed by Geoff Howie, markets strategist at
MF Global Singapore. He says that historically,
Asia’s extensive demand has either flowed overseas
or through the over-the-counter market.
"We see so many international trades flow to the US and
Europe," Howie says. However, he believes the local markets
will grow, demonstrated by the fact that 85% of
Asia’s energy requirements flow through the Asean
market. That has contributed to Singapore becoming the largest
OTC energy trading market in the world.
A different interpretation comes from Tom McMahon (pictured),
chief executive officer of the soon-to-be-launched Singapore
Mercantile Exchange and a former director of Nymex
Liquidity for commodity derivatives traded in Asia already has
presence and volumes on par with exchanges outside Asia," he
Almost all the Asian commodity exchanges, McMahon argues, serve
mainly domestic requirements, from raw commodity producers
obliged to manage risk to multi-commodity traders seeking to
protect their profits and find consumer markets.
"I think it is only natural," McMahon believes, "that
derivatives for trade flowing out of Asia should be traded in
the Asian time zone and cleared through well-regulated hub
exchanges based in the very same region and environment as the
Trading in bulk
Two markets where outflows of trade are not an issue are China
and India. These tiger economies now lead Asia’s
commodity derivatives trading volume.
oth markets are under severe regulatory constraints, which
arguably both help and hinder the markets.
In each country,
firms wanting to hedge commodity exposure are obliged to use a
domestic exchange. This gives the national bourses a monopoly
of that demand.
On the other hand, foreign market participants are banned,
cutting off a different source of liquidity.
The exchanges’ tremendous domestic success,
however, has pushed them to the top of world commodity
In June, for example, the Shanghai Futures Exchange had the
world’s three most actively traded metals
contracts – its Zinc, Steel Rebar and Copper Cathode
International market participants are desperate to get
involved, and both countries are likely to let down the
barriers eventually – something that will probably
lead volumes to soar. Just don’t expect that to
happen too quickly, warns Lawson.
"There is no doubt that China is on the path to
internationalisation but it is moving at its own pace," he
Both nations are wary of derivatives, and of the potentially
destabilising effects of foreign speculative
Kishore Narne, head of research at Anand Rathi Commodities in
Mumbai, says movement towards foreign access in India is
inching forwards. "India’s Forward Markets
Commission has suggested the idea of allowing foreign
participants to act as brokers without becoming directly
involved in the market, but as yet no talks have begun," Narne
Nevertheless, Lawson expects change to happen faster in India.
"The internationalisation of China’s financial
markets will take time," he says. "China is not driven by
political cycles and will move in a methodical fashion in
opening its markets."
A fast move
Still, China surprised many by the speed with which it opened
up its new equity index derivative market to foreign
participants. The country’s first listed financial
derivatives for 10 years began trading on April 16 –
and on May 26 a decision to allow Qualified Foreign
Institutional Investors to use the contract was announced.
However, no date has been set yet.
China is making cautious, but significant, steps forward in a
related area: loosening its grip on the renminbi. At the end of
July it scrapped restrictions on the use of renminbi in Hong
Kong. Banks can now open accounts and make payments in the
currency for any company, or offer investment products in
renminbi to individuals. Then in mid-August China opened its
domestic interbank market to foreign banks.
With or without foreign involvement, it looks certain that
Indian and Chinese exchanges are headed for the very top in
Already, by number of contracts traded, Shanghai Futures
Exchange is the world’s largest commodities
exchange in 2010, with 265m bargains by the end of
Nymex is next with 246m, then Zhengzhou Commodity Exchange
(225m), Dalian Commodity Exchange (142m), ICE Futures Europe
(125m), Multi Commodity Exchange of India (115m), Chicago Board
of Trade (106m) and London Metal Exchange (68m).
India’s National Commodity & Derivatives
Exchange is still some way behind on 21m.
These numbers do not capture the cash value of trading, but the
trend is clear. And considering the pace of domestic economic
growth, the prospect of liberalisation, and the still young
nature of these markets, there is every reason to believe
Chinese and Indian commodity exchanges are still are far from
Singapore gets its skates on
With China and India’s exchanges still confined to
their domestic markets, exchanges in the smaller Asian
countries have had space to renew their efforts in
international commodity trading.
After taking over as chief executive of the Singapore Exchange
in December, Magnus B
cker immediately moved to expand commodity trading at the
exchange and its subsidiary, the Singapore Commodity
SGX listed Fuel Oil 380 Centistokes Futures on February 22,
while Sicom added Gold Futures on March 30 and Robusta Coffee
on April 22.
In July, SGX struck a deal with the London Metal Exchange to
list mini versions of the LME’s monthly metal
futures, cash-settled against LME prices. C
opper and zinc will come first, with steel billet derivatives
later, subject to regulatory approval.
These contracts will create increased trading, hedging and
arbitraging opportunities at a time of strong interest in
metals trading in Asia," Böcker said at the end of
An executive at a
futures commission merchant in Singapore welcomed
SGX’s expansion of its commodity products, but
said that perhaps its greatest chance of success would be to
capitalise on Singapore’s extensive OTC energy
Japan wakes up
Meanwhile, Japan is also seeking to begin the long climb back
to the top echelons of global commodity trading.
Twenty years ago, Japan was home to nearly a fifth of global
futures and options trading, with particular success in
commodities. Since then, it has fallen far behind.
One obvious problem is that trading is split between the Tokyo
Commodity Exchange, Tokyo Grain Exchange, Kansai Commodities
Exchange and the Central Japan Commodity Exchange
Then an amendment to the Commodity Exchange Law in 2005 made it
much harder for Japanese commodity exchanges to market to
retail investors. Trading volumes have collapsed.
This year at last, some solutions have begun to emerge
– notably, consolidation of the exchanges.
C-Com has announced that it will close its doors in early 2011.
Tocom will take over its two main products, Gasoline and
Kerosene Futures. Tocom has also declared an interest in "two
or three" of TGE’s products.
But mergers could even go further than that. The government has
drawn up a plan to unify derivative markets, which could lead
to Tocom and the Osaka Securities Exchange being combined,
although this has been denied by both parties.
Will this be enough to revitalise Japan’s
commodities futures markets – especially now that so
many more Asian markets are operating?
The market source in Singapore says anything is possible,
especially given the significance of Japan’s
economy, but that Japan’s exchanges must
consolidate and become easily accessible to foreign
Furthermore, he argues, the country must amend its tax system.
firms that have any trading infrastructure in Japan are
taxable, at higher levels than in other countries.
Gleaming and new
While Asia’s old commodity markets have set their
sights on recovering lost ground, a couple of new upstarts have
emerged. The Singapore Mercantile Exchange has just gone live
and Hong Kong Mercantile Exchange plans to later this
SMX is the new child of Indian exchange operator Financial
It opened its doors (or at least, electronic gateways)
on August 31 with euro-denominated Brent-Euro
Crude Oil Futures, West Texas Intermediate Crude Oil in US
dollars, Gold Futures and Euro-US Dollar Futures. This
portfolio of contracts is set to expand in the
HKMEx, meanwhile, plans to start with gold futures in US
Following slightly different strategies, SMX plans to offer
commodities to a pan-Asian market, while HKMEx wants to be the
bridge between mainland China and Asia.
So what hope for the two new exchanges? Offering futures on
commodities that have an important trade in Asia has not always
resulted in substantial volumes.
An example is robusta coffee. Vietnam and Indonesia are two of
the largest global exporters, yet the vast majority of trading
in robust coffee derivatives happens at Liffe in
So what’s the solution? Each of the new exchanges
is counting on there being demand for an international
commodity exchange in the Asian time zone, and relying on what
it sees as its unique strengths.
HKMEx, for example, is proud that it can offer physical
delivery of the underlying gold and silver at a purpose-built
Precious Metals Depository at Hong Kong airport.
Howie says that for these two exchanges or the incumbents to
succeed in listing a new contract, unique specifications are
"Asia is a very niche market," he argues. "The exchanges here
have to put a product on that has some kind of niche that
exchanges in Europe and the US don’t have. There
are enough intricacies that products that suit the region can
SMX seems to agree. "
It is true that our initial suite of products is very
successfully traded at other markets," says McMahon, "but our
contracts for these products are not plain vanilla; they are
embedded with certain specifications which are unique to SMX or
our regional clients. Our Gold Futures contract, for example,
is Singapore’s first physically delivered gold
"The way to keep liquidity robust here in Asia," McMahon adds,
"is to have generic and niche products available on the same
platform, with specialised contracts rolled out every now and
then to plug requirements thrown up by the marketplace, thus
putting collaterals to most use."
Big now, bigger in the future
Predicting the financial markets is a minefield. But few seem
in doubt that Asia will extend its lead as the largest
exchange-traded commodity market in the world.
Unsurprisingly, as head of a nascent exchange, McMahon is
bullish on the region’s prospects, especially
those of Singapore.
As more barriers within the Asian trading community fall,
Singapore will by default always be several steps ahead in
terms of infrastructure and a free trade marketplace," he says.
"As proxy to marketplaces in the West, Singapore has been
leading the way also for decades already. On behalf of Asia, it
would be logical for Singapore to be the leading
exchange-traded commodity centre of the world."
Lawson (pictured) says Asia’s
growth trajectory suggests it will inevitably become the
largest region in terms of share of world GDP. "However," he
cautions, "there are no certainties in economics and the
chances of black swan events triggering a crisis remain a
possiblity for a region that is still in a developing
Unforeseen crises aside, all the trends point one way. Sooner
or later, Asia will dominate, not just as a growth driver for
commodity production and consumption, not just with the biggest
haul of futures and options contracts, but with the biggest
world share in trading by value.
The big unknown is what slices of that huge pie the
region’s many exchanges will manage to carve
Graph: Asia's big climb - global commodity futures and
options volumes since 1980 Source: FOi