From the November 01, 2011 issue of Futures Magazine • Subscribe!

Commodity trading in Asia: Slow but steady


China has a relatively short history of commodity trading. However, the country has made giant strides in this field. In 2010, Shanghai Futures Exchange (SHFE) became the world’s largest commodity exchange by number of contracts traded. "Building a sector" (below) shows the growth in trading volumes at the three major commodity exchanges in China: SHFE, Zhengzhou Commodity Exchange (ZCE) and Dalian Commodity Exchange (DCE) .

As you can see, there has been steady growth over the last decade, though volume dipped in 2011. What is remarkable is that this growth is driven completely by domestic firms.

China plans to make the renminbi fully convertible by 2015. This is a major change in its currency policy and shall be accompanied by the opening up of its stock market, bond market and commodity trading. Already we are witnessing the exponential growth of the offshore renminbi-denominated bond market (known as the dimsum bonds market) over the last year since its inception. Liberalization of the country’s stock market and commodity trading shall be paramount if the country is to realize the ambitions for its currency. This shall be nothing but music to the ears of foreign participants who are desperate to enter this space.

Singapore & Hong Kong

Singapore is the largest OTC energy trading market in the world. The island nation opened a second commodity stock exchange a few months ago. The same is in collaboration with Indian exchange operator Financial Technologies. Hong Kong also launched Hong Kong Mercantile Exchange (HKMEx) recently.

The good news about both Singapore and Hong Kong is that the operators of these exchanges realize that being in Asia and in the Asian time zone doesn’t guarantee trading volumes. They would have to differentiate themselves by offering niche products and intricate specifications that are not available on exchanges in the United States and Europe.

Similarly, providing unique services can be a great advantage. For example, HKMEx offers physical delivery of the underlying gold and silver at a purpose-built Precious Metals Depository at Hong Kong airport. This is something commodity exchanges in Chicago or London can’t match (at least not at the moment).

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