Keynote Address by Mr Kola Luu, Executive Director,Financial Markets Strategy Department,Monetary Authority of Singapore Commodity Trade and Finance World Asia Distinguished Guests, Ladies and Gentlemen, Good Morning.
1 I am delighted to join you this morning, at the Terrapinn Commodity Trade and Finance World Asia 2010. With Asia taking the lead in the recovery of the global economy and its prominent role in the re-bound of global trade, it is timely and fitting for this forum to be held in Singapore, at the heart of Asia.
Singapore’s History in Commodities
2 The history of the region and of Singapore is intimately linked to the commodities trade. Commodities trading in Asia began in the 14th century with the spice trade, bringing Indian traders, Arab merchants and eventually the Dutch and Portuguese trading houses to the region.
3 Singapore’s importance as a major port began in 1819, when Sir Stamford Raffles recognised the island as a natural choice for a port. Singapore’s strategic location at the southern tip of the Malay peninsula near the Straits of Malacca, and the presence of a natural deep harbor, fresh water supplies and timber for repairing ships, supported our growth as an important centre for both the India-China trade and the entrepôt trade in Southeast Asia.
4 Today, Singapore is known as a premier global hub port, connected to more than 600 ports in over 120 countries, offering seamless global trade connectivity. In terms of shipping tonnage, Singapore is the busiest port in the world, with some 140,000 vessel calls annually. In addition, Singapore is one of the top bunkering ports globally. More than just a container transhipment hub, we are also the world’s third-largest petrochemical refining centre . To date, Singapore is home to more than 280 global trading companies, under the International Enterprise Singapore’s Global Traders Program, including some of the world’s top integrated energy majors and the world’s largest agri-commodity groups .
Growth in Asian Consumption Drives Global Recovery
5 Let me now turn briefly to the outlook on global production and trade.
6 2009 was a turbulent year for most of us. The global economy was in deep recession, which started with the financial and credit crisis in 2008. It was only towards the second half of 2009 that signs of a gradual recovery surfaced. In January this year, the International Monetary Fund (IMF) projected that world output is expected to rise by 4% in 2010.
7 Nevertheless, recovery in most advanced economies is expected to remain sluggish, whereas activity in many emerging and developing economies is expected to be relatively vigorous, largely driven by buoyant internal demand. Growth in emerging and developing economies is expected to rise to about 6% in 2010, following a modest 2% in 2009, with key economies in Asia leading the growth .
8. Commodity prices rose strongly during the early stages of recovery. To a large extent, this was propelled by the buoyant recovery in emerging Asia. Looking ahead, commodity prices are expected to rise modestly . The economic transformation in Asia, especially in China and India, will continue to drive demand for a wide range of commodities. On-going urbanisation and industrialisation will drive demand for energy and base metals, while the rising affluence in Asia will boost demand for water, consumer goods and the underlying commodities.
9 On trade, many Asian economies experienced positive year-on-year growth in the 4th quarter of last year, mainly due to improving trade conditions in the region. Asian exports had almost returned to pre-crisis levels at the end of 2009 .
Singapore – Trade Financing and Risk Management Hub
10 As some of you may know, in May 2009, Prime Minister Lee Hsien Loong announced the formation of the Economic Strategies Committee (ESC). The Committee was tasked with developing strategies for Singapore to build capabilities and maximise opportunities as a global city in a new world environment, so as to achieve sustained and inclusive growth. The ESC recommendations were published in February this year, proposing strategies for Singapore along three broad priorities. The first is to boost skills in every job, the second is to develop corporate capabilities to seize opportunities in Asia, and the third is to make Singapore a distinctive global city and an endearing home.
11 The ESC recognised that Singapore, as a well-connected global city in the heart of Asia, is well-positioned to facilitate the increasing Asian trade flows. Flowing from this, one of the recommendations put forth by the committee is for Singapore to strengthen our position as a trading hub, and build related services such as supply chain management, trade finance, price discovery and risk management.
12 Let me focus your attention on two of these areas – namely, (i) trade finance and (ii) risk management.
13 Singapore is currently one of the key trade financing centres in Asia, ranked just after large importing and exporting countries such as Japan, Korea, China, India and Taiwan. In Singapore, there is a good community of key trade financing and credit insurance players to support the growing intra-Asian trade and the increasing linkages with Latin America.
14 As the overseas business opportunities for Singapore companies expand, the need for cross-border financing will increase. In the area of commodities trading, the need for trade financing and credit insurance for exports and imports will gain increasing importance. In particular, as global trade shifts away from financing through letters of credit to open accounts, there will be increasing demand for insurance as exporters seek to mitigate default risk, and as lending banks seek additional comfort in approving loans.
15 In many markets, structural constraints exist that limit commercial players’ ability to fully meet the needs of companies in cross-border financing, including financing for commodities trading activities. Many markets, including the mature financial centres, have specialist financial institutions, whether Export-Import Banks (EXIMs) or Export Credit Agencies (ECAs), to help plug market gaps. To this end, the recent Singapore Budget 2010 statement delivered by the Minister of Finance announced the Government’s support for the set-up of a commercially managed specialist institution to complement the role of other commercial players in catalysing cross-border financing.
16 The Government is currently looking into various models and evaluating how best to realise the development of a market-based institution to support and catalyse the growth of cross-border financing for companies based in Singapore.
17 Beyond financing, another important aspect of commodities trading is risk management.
18 The evolution of the commodities trading market typically develops from an active physical market, leading to the establishment of an over-the-counter (OTC) paper market and finally a transparent and efficient exchange-traded futures market.
19 Today, companies are exposed to tremendous volatility in the market on all commodities. The dynamics of commodities demand and supply is complex with many factors with less than predictable outcomes at work, such as the weather, disease and political events. Market players must be prepared for unexpected volatility along the way.
20 In Asia, corporates remain relatively less sophisticated in their use of commodity hedges, compared to their US and European counterparts. On a positive note, we hear that Asian corporates are starting to hedge an increasing proportion of their exposure in the OTC market, and even companies that did not hedge previously, are now proactively seeking ways to protect themselves. In the wake of the global financial crisis, concerns over counterparty credit risk have also spurred increased demand for central counterparty clearing services for OTC trades.
21 In the global financial markets, commodities are now recognised as a major asset class, making up approximately 15% of banks’ fixed income revenues. According to research by analysts at Citigroup, bank revenues from trading are expected to be 15% to 20% down from 2009, with commodities being the only sector with expected growth . The high volatility in the commodities market also means increased interest from institutional asset managers, particularly hedge funds , adding liquidity to the paper market.
22 In Asia, liquid but fragmented futures exchanges have developed across various markets, particularly in India and China. However, regulatory restrictions on foreign participation in these markets have meant that the Indian and Chinese exchanges remain largely domestic and the majority of Asian-driven hedging is executed through global exchanges in the West.
23 In Singapore, a sound and stable regulatory framework, a conducive business environment, a well-developed financial centre and established market infrastructure have supported our development as a key hub for commodity derivatives trading and risk management. Singapore is well-regarded as Asia’s leading OTC commodity derivatives trading hub, accounting for more than 50% of Asian volumes.
24 Today, Singapore is Asia's price discovery and trading centre for refined oil products, a key pricing centre for rubber, and is increasingly a location of choice for other sectors including coal, freight and agri-commodities. Apart from the critical mass of global commodity traders in Singapore, we are also the Asian headquarters for many global banks’ commodity activities, providing sophisticated risk management and hedging services to regional corporates. In fact, we are pleased to see many banks expanding their commodity activities in the region, using Singapore as a base for tapping the growing opportunities in Asia.
25 In addition to an active OTC market, Singapore also offers efficient access to global futures trading platforms and clearing houses. However, given the increasing prominence of Asia as a major producer and consumer of key commodities, players are increasingly seeking Asian-centric pricing benchmarks and hedging solutions. Hence, while Singapore continues to provide a gateway for players to access global platforms, there are also growing efforts into the development and introduction of Asian-centric contracts on Singapore-based trading and clearing platforms.
26 In May 2006, the Singapore Exchange (SGX) launched SGX AsiaClear, its central counterparty (CCP) clearing facility for energy and freight derivatives. In addition to a broad suite of energy swaps and freight forward agreements (FFAS), AsiaClear has since launched the world’s first benzene swap contract and iron ore swap contract to cater to the needs of a growing network of Asia-based counterparties. Since the onset of the global financial crisis, high market volatility and the increased need for credit risk mitigation have propelled AsiaClear to achieve a record clearing volume in 2009, where clearing volume increased by 94% as compared to the previous year. The increase in awareness of counterparty risk has also contributed to the growth of AsiaClear's customer pool which jumped by 71% to over 440 counterparties globally, from Asia to Europe .
27 In February this year, the Singapore Exchange (SGX) launched a fuel oil 380-centistoke futures contract to provide a more efficient and transparent price discovery mechanism, serving the trading and risk management needs of the oil trading, bunkering and shipping market participants. The Singapore Commodity Exchange (SICOM), a company of SGX, also plans to launch a deferred-settlement gold contract next Tuesday and a Robusta coffee futures contract on the 22nd of April, this year.
28 Another significant development in the Singapore commodity futures market is the set-up of a new commodity derivatives exchange in Singapore - the Singapore Mercantile Exchange (SMX), owned by India’s Financial Technologies (FT) Group. SMX, which is targeting for launch mid this year, will be the first Pan-Asian multi-product commodity derivatives exchange offering a comprehensive basket of commodity derivatives for trading, including futures and options contracts on precious metals, base metals, agriculture commodities and commodity indices. We believe this development will further strengthen Singapore’s lead as the region’s commodity derivatives trading hub.
29 Significant developments are taking place in the global commodity derivatives markets. MAS would like to see continued emphasis on efficient risk management infrastructure, as well as the ongoing development of a qualified talent pool with deep knowledge of the sector who will uphold proper market conduct.
30 IE Singapore and the MAS will continue to support the development of professional training courses and investor education programmes to deepen the expertise in the sector. We will also maintain close dialogue with relevant stakeholders to ensure a robust, yet conducive regulatory environment, for the development of a vibrant commodity derivatives market in Singapore.
31 To conclude, the development and growth of the global commodities market will signify the growing importance of Singapore’s role as a key financing and risk management hub for the sector. In promoting regular dialogue and close co-operation among stakeholders, we look forward to hosting more of such industry conferences to provide a world-class platform to promote the confluence of ideas amongst key industry professionals.
32 On this note, I wish you all a successful conference and to our overseas speakers and delegates, a pleasant and fruitful stay in Singapore.