New Trading Possibilities
SAARC could become one of the strongest economic blocs in the world if its member nations joined hands to form a centralized commodity exchange.
SAARC countries have millions of acres of arable land and a reasonably robust agricultural and manufacturing base. Even then, a very large percentage of the population of SAARC countries lives below the poverty line. It is because they still survive on agriculture using primitive methods which keeps the yield low while wastage is high. Hostilities among most of the countries have kept the intra-bloc trade at the lowest level when compared to other regional blocs.
In some of these countries, the stock markets have emerged stronger because of foreign investors who hold a substantial stake. According to reports, foreign investors owned nearly one-third of the listed capital in Pakistan, mainly due to the ease
of inflow and outflow of portfolio investment. As against this, similar incentives are not offered to investors of commodity markets. There are other reasons as well that have adversely impacted the growth of commodity markes, particularly the futures market because producers, traders and even financial institutions prefer entering into deliverable contracts.
This part of the world has always been rich in agricultural produce, particularly staple food grains (wheat, rice, maize and pulses), sugarcane, spices, edible oil and cotton. As the region has a huge population, there also exists a huge domestic market. Over the years, the exportable surplus became bigger, which resulted in the export of commodities and intermediate goods.
The traditional market system comprises producers, middlemen (whole sellers) and retailers. Middlemen have also been playing a double role, providing cash to the producers for the purchase of inputs despite development of the commercial banking system and purchase of produce, mostly at a highly discounted price.
In the days of yore, there always existed markets even in the smallest towns where farmers could sell their produce. In modern terminology, the buyer and seller used to enter into deliverable contracts, at times without any formal documentation. In those days verbal commitment was considered good enough. While the developed markets introduced futures contracts or derivatives, deliverable contracts remain the preferred choice in this part of the world.
Within SAARC, India, Pakistan and Bangladesh are considered relatively big countries both in terms of commodities produced and consumers. While deliverable contracts are common here, only a select group of investors deal in futures, which is generally considered a zero-sum game. The quantum of futures trade has also remained low due to the existence of markets where commodities could be bought and sold.
This could be best understood if one looks at the trading of cotton in Pakistan. The country is among the world’s top five producers of cotton and supplies raw material for the textile and clothing industry. Cotton trade contributes nearly 60 percent to the total export earnings of Pakistan. The Cotton Exchange has been operating in Karachi for decades but transactions concluded at the exchange have declined considerably. Spinning mills prefer to buy cotton directly from the ginning factories located throughout the country.
Ideally, the SAARC member countries should be complementing each other’s requirements because of their common borders and road and railway links. However, it is often felt that hostilities, created by the hawks prove spoilers. This statement gets credence if one looks at the intra-SAARC trade as well as the existing far from cordial diplomatic relationship among the three largest SAARC countries, i.e. India, Bangladesh and Pakistan. These countries enjoy competitive advantage in some sectors. If they join hands, SAARC could become one of the strongest economic blocs in the world.
The stock market in Pakistan has attracted huge foreign investment. Three stock exchanges operate in the country, but only one commodity exchange is in operation. Contrary to the stock market, the interest of foreign investors in commodities has remained very low. The prevailing situation can be attributed to the fact that the bulk of investment in commodities is made in crude oil, gold and silver. Therefore, there is no incentive for foreign investors to trade in these commodities at exchanges located in these countries.
One of the ways to attract foreign participation in the local commodities is to facilitate trading in indigenous produce, i.e. rice, cotton, sugar, jute and guar. Lately foreigner investors showed enormous interest in guar because of its extensive use in shale oil and gas exploration. Another example of the development of a niche market is palm oil, mostly produced in Malaysia and Indonesia. Yet another example could be sugar, both raw and refined and its byproducts, i.e. molasses and ethanol. India and Pakistan are among the top producers of sugar. The recent drought like situation in Brazil, one of the largest exporters of sugar and ethanol, highlighted the fact that other sugar producing countries have to increase their footprint.
The Pakistan Mercantile Exchange is the country’s first and only multicommodity futures exchange, which is licensed and regulated by the Securities and Exchange Commission of Pakistan. It is the biggest exchange of the country in terms of members and the second biggest in terms of value traded, after the Karachi Stock Exchange. The commodities traded at the PMEX can be clubbed in four groups – agri produce, precious metals, crude oil and financial futures. The new commodities to be included will be copper mills and specific sugar contracts. A unique product in the PMEX portfolio is the ‘Milli Tola Gold’ in which an investor can begin investment with an amount as little as Rs.50 and get physical delivery when the invested amount becomes equal to the price of 10 tola gold.
India has the largest number of exchanges which include the National Stock Exchange of India ( NSE), the Bombay Stock Exchange (BSE), the Multi Commodity Exchange (MCX), the MCX Stock Exchange (MCX-SX), the National Commodity and Derivatives Exchange (NCDEX) and the National Spot Exchange.
In Bangladesh there are two stock exchanges and one commodity exchange, namely the Dhaka Stock Exchange (DSE), the Chittagong Stock Exchange ( CSE) and the Bangladesh Commodity Exchange (BDCOMEX).
The exchanges operating in Nepal include the Commodities and Metal Exchange Nepal Ltd. ( COMEN), the Derivative and Commodity Exchange Nepal Ltd. (DCX), the Mercantile Exchange Nepal Limited (MEX), the Nepal Derivative Exchange Ltd. (NDEX), the Asian Derivative Exchange Ltd. (ADX) and the Wealth Exchange Limited (WEX).
Since South Asian countries are dependent on imported crude oil and gold, commodity exchanges can’t generate substantial business in these commodities. As against these, substantial quantities of cotton, rice, sugarcane, gaur, jute, listing of cash settled and deliverable contracts of these commodities can generate considerable business. The quantum can increase if arrangements are made whereby investors from other countries can also invest, trade and hedge. However, this objective cannot be achieved unless the outstanding issues, particularly between India, Pakistan and Bangladesh, are resolved.