FIA Asia-V: Asian Commodity Futures Bloom Despite COVID’s Chaos

oil, crude, derivatives,
Suzanne Cosgrove

Suzanne Cosgrove

Editor

While the pandemic was a major economic disruptor in 2020, impacting global demand and the supply chain, the use of futures and options grew in Asia as more investors used them as hedge and arbitrage vehicles, said members of an FIA Asia-V panel devoted to change in the world of global commodities.

 That process was not without its pitfalls, noted several panelists in a discussion moderated by Bill Herder, head of Asia-Pacific for the FIA, at the second day of the conference. 

Brett Cooper, Asian head of commodities for the financial services network StoneX, said COVID’s impact on the global supply chain — and the security of that supply chain — were major factors in commodity trading this year.

In addition, Peter Zaman, an attorney with Reed Smith, said a key event for derivatives this year was the drop to negative oil pricing in April and the dislocation of price discovery on an exchange. Essentially, “you had an exchange saying, ‘you have to pay me to take your oil,’” he said. In its wake, oil prices dropped and jet fuel prices dropped, he noted.

Samuel Ho, CEO of Bursa Malaysia Derivatives Berhad, said COVID “threw everything off track” and predicted that some of that related volatility would continue.

Mauree Poh, a director at Helmsman LLC, a Singapore-Hong Kong law practice that specializes in shipping and commodity trading, reported doing more education and hand-holding with clients this year as concerns over regulations increased.

At the same time, the growth of Chinese futures was accelerated by the impact of COVID-19. 

Li Ning, chief Singapore representative of the Dalian Commodity Exchange, said China was not exempt from the profound impact of COVID. But China continues to be the largest global  importer of commodities, and volumes have been sharply higher than last year, he said.

That trade continues to grow the derivatives industry, he said, and the Dalian exchange continued to launch new products. A total of eight commodities options products were launched this year,  “and with joint efforts, we will continue to cope and grow our industry,” he said. ”I believe China will continue to open up and attract more international players.”

Zaman pointed out, however, that the Chinese futures market is not identical with that of other global companies, but “like everything else in China, is a made-in-China version.“

There is an internationalization of the Chinese market, but all its benchmarks are versus the U.S. dollar, Zaman noted. “I don’t think the PRC (Peoples’ Republic of China) will embrace dollar benchmarks as an ideal long-term goal,” he said. There are a lot more arbitrage opportunities, however. “We’ll have to see how that plays out over time.” 

Cooper at StoneX said he was pleased with the gradual opening of Chinese exchanges to foreign firms. “I think it’s fantastic. Eventually, it will be more price efficient…probably it will take out a lot of the basis risk that people have had to endure.”

Poh of Helmsman noted that a more open China has impacted the markets since the 1980s, but industry standards were established by the West. It will be interesting to see if those standards evolve, she said, as the futures markets become truly international.

Zaman said the U.S.-China trade war was a key factor in 2019 and 2020, and caused some clients who wanted to get into China to hesitate. That definitely had a market impact, as did tensions between China and Australia. For example, it led people to worry about where the coal produced in Australia would go if China wouldn’t take it, he noted.

Currently, the EU’s goal to be the first net-zero continent is impacting the most of commodities trade, as anything imported into the EU has a carbon tax.  “It’s not incidental,” Zaman said, that China now also plans to adopt a net-zero policy.

He said comments by President-elect Joe Biden that indicated the U.S. would rejoin the Paris Accord, or Agreement,  “reduces tensions. (Previously) it was a train wreck waiting to happen.”

Poh, who earlier noted that data has increasingly become commoditized in Asia as well as in the West, said benchmarking ESG is “very important” as the world moves toward carbon neutrality. 

And Li Ning, of the Dalian Commodity Exchange, said ESG has become an increasingly important focus for research and development at the Chinese exchange.

Asked by Herder for their views on ESG, and why it is now such a strong market focus, Zaman said the 2030 deadline set by the Paris Accord was a key driver. “We are running out of time,” he noted. “And the pandemic pushed it over the edge.” He added: “Historically, the focus has been on governance (such as corporate board structure, company oversight and transparency), and only in the last 10 years has the focus been on the environment.

“Price discovery between green and non-green products will settle the argument,” Zaman said. He predicted Asia will be the last to adopt carbon neutrality. “America will catch up with Europe and Asia will follow,” he said. 

Looking beyond 2020, the biggest threat — or need — on the horizon is for more reliable technology to handle increasing volume, said Li Ning. Chiming in, Zaman added the issue of debt. He said he will be watching to see how the global debate between more borrowing versus austerity will play out.

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