Profit, talks to Mr Samir Ahmed, MD Pakistan Mercantile Exchange Limited to discuss the prospects of the commodity market in Pakistan.
International outlook
The individual and institutional investors took shelter in the commodity market as fear for the re-emergence of a double dip global recession, emanating from the financial centers in US and Europe, played havoc with sentiments of the risk-averse traders on the volatile equity and currency markets. Samir Ahmed, Managing Director of Pakistan Mercantile Exchange Limited (PMEX), says the country’s first and only de-mutualised commodity futures exchange provides investors with a safer and transparent forum to hedge against the unpredictable market risks. The global financial negatives led by American debt ceiling and European debt crises was a sort of blessing in disguise especially for the commodity market in Pakistan which welcomed huge investment from the already volumes-starved capital market and saw the (per ounce) gold prices climbing to the historic $1800 mark. The PMEX managing director discussed these and other issues related to the commodities exchange at length in an exclusive interview with Profit.
700 per cent appreciation in gold
About the recent hike in international gold prices, Samir said gold had witnessed a 700 per cent appreciation in its prices during the past decade. “It skyrocketed from $250 to $1800 (10 grams) with 2010 and 2011 seeing a respective price hike of 29 and 30 per cent,” Samir said.
Reasons for the price hike?
The MD PMEX cites two major factors. Firstly, a weakening US dollar had tempted the central banks the world over to go for extensive buying of gold during the last couple of years. The PMEX MD recalled that there was a time when the central banks used to sell on average 500 tonnes of their gold reserves every year. “The central banks are diversifying their reserves in view of the troubled US economy and the resultant weakening of the dollar,” he said. Samir said Euro being a weak currency could not be an international safe haven for the risk-averse individual and institutional investors therefore turn to gold. “People are now seeing gold as a safe haven after the traditional safe heavens (like euro and dollar) came under question during the recent debt crisis,” he added.
Countering the inflation effect
Secondly, Samir said, was the inflation factor. “Gold maintains its prices over time, making itself a big beneficiary of the ongoing financial crisis that could worsen further.” “As an exchange we are bringing international commodity prices (be it gold, crude oil or silver) on real time basis (live) that enables the traders at PMEX to benefit from international prices,” Samir said. Samir said PMEX was the only licensed and regulated institution in the country where transparency of the dealing is guaranteed. “You can keep your gold in your account with us and guarantee it in the open market.” The managing director also sees the PMEX as a great platform for those willing to invest in fuel where the price volatility remains greater. “The investors could book their demands months ahead (on PMEX) where we are giving a good platform to hedge their price risk,” he said.
Introducing agricultural commodities
Whereas the Exchange has secured the Securities and Exchange Commission of Pakistan’s (SECP) nod for the hedging of risk management in cotton contracts, other agri produces like wheat and maize are also in line. The PMEX, according to Samir, was also planning to do some industrial metals like steel, copper and zinc in 2012. “Research is underway to determine specification of the commodities.” About demutualisation of the commodity exchange, Samir said demutualisation was the rare distinction of PMEX and was very helpful in avoiding the conflict of interest on the market. “From day one this Exchange is demutualised and is, therefore, free of conflict of interest. The Exchange is run for the benefit of all stakeholders,” he said.
2008 market crash
Asked if the equity market-like price manipulation was possible on the PMEX, Samir replied in the negative, “Almost every commodity like gold, silver, crude oil is internationally traded, so there is no question of price manipulation or to say influencing the market,” the MD said. Feeling pride in having a tremendous increase in trade volumes at the PMEX, Samir said investors were now switching to the commodity market where the average turnover had recently hit the Rs118 billion mark against the Rs52 billion total portfolio of the local shares markets. “Normally, commodity markets are much larger than equity markets.” When we asked for his expert opinion regarding the local stock markets where trade volumes were depleting, Samir said along with other negatives the closure of Karachi Stock Exchange for four months during the 2008 crash had inflicted an irreparable damage upon the investors’ confidence at the country’s largest bourse. “The setting of a floor was a silly move. You should allow the market to flourish on its own in an orderly way,” viewed Samir.
Declining volumes
The PMEX chief said the local bourses direly needed new enlistments for seeing increased volumes. “The size of the market is not growing in terms of new enlistments. You need new companies to come for enlistment that would increase the volumes,” he said. The liquidity crunch on the stock market and other macroeconomic issues were other factors that Samir said were keeping the investors at bay at KSE. Regarding the Capital Gains Tax (CGT) controversy at KSE, the PMEX MD said more important was the question of “how to collect the levy”. “It’s all about the comfort of the investor.” Underlining salient features of the exchange, Samir said the PMEX was owned 100 per cent by institutions with National Bank of Pakistan (NBP) holding 9.0 million (47.4 percent) shares, Karachi Stock Exchange (KSE) 3.64 million (47.4 percent), Lahore Stock Exchange (LSE) 2.27 million (19.2 percent), Islamabad Stock Exchange (ISE) 2.27 million (11.9 percent), PKIC 0.91 million (4.8 percent) and ZTBL 0.91 million (4.8 percent) shares totaling 19 million shares.
Stability and transparency
He said the PMEX ensures two things. First, the prices of listed commodities remain in check thus stable. Second, a transparent futures-based trading mechanism provides the risk-averse investors with an effective risk management, also called lodging, tool that guards the investors against price volatility and the losses it incurs. “The downfall of prices does not adversely affect the investors at the commodity exchange. The price lock in futures trading enables the investor to move on with manufacturing works advantageously. Similarly, the farmers may grow (their crops) as per demand,” he said. He said cotton had been very volatile with its prices being variable across the country. “The market ensures that the prices remain discounted.” Unlike the volumes-starved stock market, the commodity market presented an impressive year on year growth of 671 per cent during the previous fiscal year, according to PMEX’s July 6th statement. In terms of volume this growth amounted to Rs490.515 billion in FY11 against Rs63.610 billion of FY10.
Future of the commodity market
And these trading volumes would certainly go up further, as Samir said; the exchange was tending to switch, in terms of enlistment, from raw commodities to refined ones. He said the exchange would be working on the prospect of ginned cotton, refined sugar and milled rice in which the millers and not the farmers would be the sellers of agri produces. “The millers and farmers would have a direct correlation, we would be working on it as soon as we mitigate some infrastructure issues,” the MD said. “Commodities are now recognised world over as an equal asset class along with equity, bond and currency markets and Pakistani investors could also invest in PMEX in a transparent way,” Samir said. The PMEX current product portfolio includes international commodities like gold, crude oil, silver, palm olein and domestic commodities like IRRI-6 Rice Futures Contract, sugar, financial futures and KIBOR futures contracts.
