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In an Interview, Neil Fleming; the Commodity Markets Specialist, Explained

The Benefits of Commodity Exchanges for the Economy
In an Interview, Neil Fleming; the Commodity Markets Specialist, Explained

Neil is a commodities markets, energy data and editorial consultant with some 28 years’ experience in various institutions including as interim Head of Content for ICIS, independent Strategic Advisor to the ICIS group, as Vice-President at oil, energy and commodities market information publisher Platts, consultant of International Energy Agency, the Norwegian government, educational publishers Espresso Ltd, and sub-Saharan African downstream specialist consultants CITAC. Working with CITAC, he has developed and delivered numerous energy market and risk-management training programs for governments and businesses in the African petroleum sector.
Neil was the author of “Old Oil, New Rules”, a forward-looking overview of the future of energy markets published by McGraw-Hill in 1999. From 2002-2008, he chaired the judges panel for the Platts Global Energy Awards, and has been a speaker at energy conferences around the world since 1994.
Regarding Neil’s fruitful resume and his high level of experience in the field of commodity exchanges and data analyzing, especially in petrochemical markets, we have arranged a conference call with Neil to ask his opinion about the importance of commodity exchanges in the world, the challenges of launching Futures contracts, considering government interference in commodity trading processes as well as the significance of offering and trading strategic products such as petrochemicals in commodity exchanges.
*What are the benefits of commodity exchanges for an economy?
The commodity exchanges have many benefits to the economy and we can outline two of them as the main advantages. The first major advantage is to create‎ transparency in the market and the second one is that commodity exchanges help market participants to control their transactions risk. With contribution of the commodity exchanges, market participants can enter financial market easier and the possibility of facing troubles and disorder in transactions will be less.
*What is the biggest challenge to create, develop and boost commodity exchanges in emerging economies, nowadays?
I think the biggest challenge in this area is to create‎ a trading contract that can fulfill market needs and demands. Many exchanges in a number of different commodity markets have attempted to launch futures contracts, but these contracts have not succeeded, because either there was not any balance in selling and buying products in the market, or pricing for each contract was not related to a specific market and the pricing process was wrong.
Another problem is that market participants did not consider those contracts as an effective tool of risk management and have stated that these contracts will damage the market, more. This challenge really is a big challenge facing all markets, especially in emerging economies, because designing a futures market requires a comprehensive review and some kind of marketing in order to attract market participants. The history of Futures is not very encouraging and settling this kind of contracts, especially in the field of petrochemical products is very complex and difficult. However, if this type of contract after adequate consideration and work starts to operate properly, it will help market participants to increase the efficiency of the industry as well as to hedge risk of price fluctuations in the market.
*What kind of solution do you recommend to deal with the challenges of settling the futures market?
The key strategic solution is to study carefully each market before launching any type of contract in order to identify products and factors affecting the result of efforts on those products.
For example, before launching futures contract, one must pay enough attention to liquidity in the market, the tradability of the product, the market size and the number of actors such as buyers and sellers of the product, appropriate pricing and monitoring of factors affecting the risk to be able to design and launch an effective trading system. For example, many activists during the years 1998-2000 in New York, on numerous occasions tried to set up futures to trade crude oil, and however many transactions were conducted for this product, but the determined price was not relevant to the market and market participant who were trying to control their risk. In fact, there was a mismatch between physical trading contracts and a system that was implemented for these transactions, so the market players could not use it.
*Do you have any experience of futures and options for hedging risk and attracting investment in petrochemicals sector?
We have a series of preliminary negotiations with a number of commodity exchanges especially China Mercantile Exchange and discussed how to create‎ a mechanism through licensing some data on the Shanghai Future Exchange because they are launching contracts for styrene monomer in Beijing. In addition, we have talked some other commodity exchanges over the last year. Our experience shows that commodity exchange are eager to launch futures contracts based on petrochemical products, but because some countries do not have any advantages in the petrochemical market, and due to a complicated process of studying and launching these kind of contracts, they prefer to establish financial markets and futures contracts on easier assets.
In fact, our role is to examine and study the available information on the market, but we do not have a role in the designing of this type of contract. In many of these markets, for example in Singapore, market participants are trying to hedge their risk through financial instruments in the market of crude oil, polyethylene and gasoline, but in other petrochemical products either there are no hedging tools, or they are inadequate.
In this regard, we have great cooperation with brokerages and market participants in South Asia to find ways to attract interest in controlling price risks. For example, we have studies in polyethylene and polypropylene markets, and considering the high fluctuation in the prices of these products, realized that we can launch futures contracts for these two commodity that are now being consulted.
Also the other thing that can help us in setting up futures market to trade petrochemical products is a robust Futures exchange or swap transactions or anything that would increase transparency in price discovery. We strongly believe that these tools must exist in commodity exchanges, based on experiences, the commodity exchanges can contribute significantly to the growth and development of industries in various fields.
*Do you think a government has the right to interfere in the process of trading and pricing commodities in exchanges?
In general, we can say that investors and market participants are not interested in entering the market and transactions that the government interferes in their processes. For example, crude oil is a strategic commodity in the world and this product prices are accepted by all countries because none of the governments can interference in the process of trading this commodity. Also, OPEC is also used as a benchmark to the crude oil price because no one except traders do not play major role in determining the final price. Thus the whole world accepts prices as a benchmark that is safe from government interference and is obtained from the transactions in free markets.
However it is very interesting that in Europe, the EU is imposing many regulations to market and this increases concerns about whether this means that government will interfere in the market or not, if the answer is positive, there is no doubt it will damage Europe markets.
*What is the significance of presence of major industries such as petrochemical products in commodity exchanges?
To answer this question, I must say that offering of a product in a commodity exchange is directly related to its market in that country.
For example, some exchanges with agricultural products, some with metals and some other with energy trading have gained a reputation, and this is completely related to competitive advantages of various countries in production. However, we can find a contradiction in this case, for example, there are some countries which do not produce a special commodity, but they are as benchmark to determine prices for that product and this happens due to strong trading platforms, international traders and experiences of that particular exchange.

Author: International Affairs and PR

ID: 50053779

Published on: Saturday, September 19, 2015 08:00

Source: IME

View count: 75

Tuesday, December 11, 2018 10:03

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