Pan-Asian commodity exchanges

Written by Sudhir Kapur | Updated: Jan 28 2008, 04:12am hrs
During Prime Minister Manmohan Singhs visit to China, the focus of discussion was on political-strategic-trade issues. With the two Asian giants becoming increasingly large consumers of major metals, oil and agro-commodities, there is also a need for increasing cooperation in commodity markets that could enable the eventual emergence of pan-Asian commodity exchanges. These can become new centres of commodity price discovery in the Asian continent, as against commodity exchanges in Europe and the US.

There are three commodity exchanges in China after the merger of 50 exchanges into 14 in 1995 and subsequently into three in 1999. Indias three national commodity exchanges, a fourth on its way, and 20 regional exchanges need to collaborate among themselves, and also with Chinese and other major exchanges in Japan, South Korea, West Asia, Malaysia and so on, to become price signallers of the commodities in which Asia is a large producer and consumer.

Around 2003-04, China overtook the US to become the worlds leading consumer of copper, nickel, iron ore, lead and other non-ferrous metals. China now consumes some 22% of global copper and aluminium output, compared to Americas 16% and 20% respectively. Its steel output of 489 million tonnes in 2007 is more than twice that of the US and Japan combined. This year, China, already the second largest oil consumer, could displace South Africa as the worlds largest gold producer.

India shows rapidly rising trends, too. Making the worlds cheapest car can make it a global auto hub, and large investments in power and infrastructure will see commodity demand boom.

National commodity exchanges in India are a post-2003 phenomenon, and it took much urging by many Indian academic and other international institutions for the government to give the go-ahead. Now, it is time to leverage the gains of the last four years by removing legal and institutional constraints, and by adopting a global outlook. The necessity for efficient and highly liquid commodity exchanges in India (and more broadly, Asia) has also been emphasised at a recent Assocham-organised international conference on commodity futures.

Asian commodity exchanges can easily become the places where relevant prices are set. This could also decouple the regions commodities in terms of trading from forces that operate in Europe and the US. Consider the production and consumption potential of more than 60% of the world population that lives in Asia, and it is clear that the process of price discovery in many commodities may easily shift eastwards. Policymakers across the region need to speed up the pace of reforms in commodity markets and also take measures to expand the same.

Already, major commodity exchanges of Europe and the US are tracking demand-supply fundamentals of Asian countries like China and India for price discovery. The IntercontinentalExchange Inc for sugar and Chicago Board of Trade for wheat are prime examples.

The commodity price boom of the last 3-4 years has generated surplus funds with investors and governments of commodity-producing Asian countries. As a result, there appears to be a gradual shift in financial clout and economic momentum from west to east. If even a small fraction of surplus international funds can be attracted to boost the liquidity of Asian commodity exchanges, there can be a marked improvement in efficiency of these exchanges.

Presently, MCX has a strategic partnership with some Asian exchanges such as Tokyo commodity exchange, Zhengzhou commodity exchange, Shanghai futures exchange and Busa Malaysia derivatives Berhad. Cooperation across Asia, amid globalisation, could facilitate the emergence of an Asia-centric new world economic order of the 21st century.

The author is a fellow of Indian Institute of Foreign Trade, New Delhi. These are his personal views: Email: Sudhirkapur_1@yahoo.com