From Iron Ore to Eggs, Asia Builds Commodity Pricing Clout

From Iron Ore to Eggs, Asia Builds Commodity Pricing Clout

By Manolo Serapio Jr & Melanie Burton

 on 1:54 pm December 4, 2013.
Singapore. From iron ore to eggs, Asia’s new commodity derivatives are drawing in global exchanges eager to profit from rising trade volumes and a likely shift of pricing benchmarks from the West.Asia has long been the fastest growing demand region for the raw materials to power economic growth, but has mostly priced the purchases against benchmarks like Brent crude, London Metal Exchange copper or New York cotton.

Now China, and to a lesser extent Indonesia, are launching policies and products aimed at cutting Western dominance, forcing exchange operators from outside the region to either acquire a local player or set up their own Asia bourse.

“The ability of Asia to form a price is sure to improve,” said Michael Syn, head of derivatives at Singapore Exchange.

“Sooner or later they won’t be waiting for London or the US to open up. There will be an Asian time-zone price because it’s natural, all the consumers are here.”

Setting the benchmark price would give deeper, more liquid futures and swaps markets to feed better price discovery in the Asian time zone.

For example, the 30 million barrels a day of oil consumed in the region — a third of global demand — is nearly all priced against North Sea Brent crude futures. This means China can end up paying more for its oil because of a field outage off the coast of Scotland.

China has launched six commodity futures contracts this year — coking and thermal coal, bitumen, iron ore, short-grain rice and eggs — most of them drawing strong volumes.

Indonesia wants to ensure it will have a bigger say in pricing tin. It is the world’s top exporter but the global benchmark is the London Metal Exchange contract.

Indonesia in August forced all its tin ingot exporters to trade their physical metal on a domestic exchange before shipping, in a bid to raise prices and curb illegal mining.

Volumes on the Indonesia Commodity and Derivatives Exchange have more than trebled, and the exchange plans to launch a futures contract next year.

There are two Asia-based global commodity benchmarks — Tokyo’s rubber futures and Malaysia’s palm oil futures — both of which for raw materials mostly consumed and produced in the region.

In part, the new contracts reflect China’s steps to cement its currency as a vital unit of global trade and an alternative to the dollar.

This strategy has not been not lost on global bourses who stand to profit from the huge burst of trading liquidity ahead of yuan convertibility, which economists see happening by the end of the decade.

“Where are all the very large commodity exchanges in the world building now as we speak? In Dalian, in Shanghai,” said Jean-Francois Lambert, global head of commodity and structured trade finance at HSBC.

“If you have convertibility, then suddenly you have China with large commodity exchanges and one of the strongest currencies in the world,” he said.

Betting on liquidity rising

Global exchanges, banking on greater volumes of trade in Asia, are setting up shop in the region.

Intercontinental Exchange Group said on Nov. 19 it would buy Singapore Mercantile Exchange for $150 million to secure the infrastructure for trading and clearing in Asia.

“We see the potential of the energy world maybe trading more in Asia than it does today, and we want to be prepared to serve that,” ICE Chief Financial Officer Scott Hill said shortly after the acquisition was announced.

The Tokyo Commodity Exchange is in talks with CME Group , the biggest operator of US futures exchanges, to create the world’s first futures market for liquefied natural gas, Japan’s Nikkei newspaper reported on Friday.

Hong Kong Exchanges & Clearing, which last year bought the London Metal Exchange for $2.2 billion, is betting the payoff will come from growing volumes in Asia.

Volumes of gold traded on the Shanghai Futures Exchange soared to record highs when the bourse opened night trading in July. The exchange said last week it plans to extend trading hours for industrial metals in December to better tap into global trade.

In iron ore, volume on the most-active May contract at the Dalian Commodity Exchange reached more than 121 million tonnes a month since its Oct. 18 launch, nearly seven times the total volume of derivative swaps that top global clearer Singapore Exchange handled in October.

“We believe that over time, China will develop in the commodity market in the same way Europe or the US have developed, with an internal market with arbitrage opportunities, storage and logistics and so forth,” said Marco Dunand, chief executive and co-founder of global trader Mercuria.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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