Asiamoney.com: SMX’s bid for bulk

Asiamoney.com Opinion, September 2010

If you build it, will they come? The central issue facing the new Singapore Mercantile Exchange is not whether there’s a logical basis for its existence, which there clearly is. It’s whether that’s enough of a reason for people to gravitate to it.

The new exchange is billed as the first pan-Asian multi-product and currency derivatives exchange. Its premise, in a nutshell, is this: Asia is at the heart of commodities, whether it’s in terms of mining or growing them, storing them, processing them or consuming them. The only area where it isn’t at the heart of commodities is in trading.  That either takes place on closed local exchanges, or many thousands of miles away in Chicago, London or New York.

On the face of it the existing arrangement makes no sense. Why, the new exchange’s backers argue, should a company like Olam or Wilmar or Noble – all Singapore-based commodity leaders – have to go at least eight time zones away in order to hedge their exposures? Singapore, of all places, makes this situation appear incongruous: one only has to look at the port to be reminded of the volumes of goods that move around the region, while its Jurong refineries are among the most dense concentrations of oil processors in the world.

But it’s not as if Asia is any stranger to commodity futures trading. China has, little-noticed, developed a position of global dominance in one contract after another in the last few years. Ask most people where the most widely traded sugar futures contract is, or soybean oil, or natural rubber, and they would likely guess Chicago. Wrong: the correct answers are the Zhengzhou Commodity Exchange, Dalian Commodity Exchange and Shanghai Futures Exchange, respectively. Zhengzhou’s sugar contract was the top agricultural future or option anywhere in the world in 2008 and probably will be in 2010 as well.

How about copper? Has to be London, right? No – Shanghai again. And to get a sense of the pace at which these things are developing, take a look at Dalian’s plastic futures: it traded its first ever such contract in 2007 (LLDPE, a linear low-density polyethylene) and is already the world’s leading plastic futures market.

India’s Multi Commodity Exchange illustrates the same point: only launched in 2003, it is, it says, the sixth largest commodity futures exchange in the world, and the world leader in silver contracts, for example.

But what binds India and China is that in neither case are these markets truly open, particularly China, where currency controls remain rigorous. It is extraordinary that China’s exchanges have reached such vast volumes entirely on domestic business, but that goes some way to demonstrating just how much activity an open Asian market might enjoy.

So, Singapore Mercantile Exchange boasts a decent array of promising prospects: open; with the strength of infrastructure and regulation that Singapore provides so well; in the right time zone for where the action is; and with a few sensibly chosen contracts to test the waters (West Texas Intermediate and Brent crude, gold with physical delivery to vaults near Changi airport, and the dollar/euro currency pair). The question that will make or break it is whether convenience and logic are enough to make people change their ways, and to bring liquidity with them. Asiamoney’s view is that it will happen eventually but that any expectations of an overnight transition are well wide of the mark – in fact, it could take years to get to the sort of critical mass that will really mark the exchange as a success.

There is, incidentally, another interesting aside to this story, and that’s the backers of the new exchange. Singapore has prided itself for decades on its openness and its ability to build a world class financial centre, and in numerous areas – forex, oil trading, private banking, hedge funds – it has succeeded in doing so. But the infrastructure itself is generally considered homegrown: Singaporeans know how to make the right framework and they have the technical ability to streamline it.

Interesting, then, that this new exchange is not only developed but owned by an Indian company, Financial Technologies (India). These guys have quite a track record: they also made India’s Multi Commodity Exchange and have built other bourses in Bahrain, Dubai and Mauritius, among other places. It’s a sign of the times that India should have managed to export leadership in stock exchange development before the country itself has even removed its capital controls.