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Hedge Fund Monthly

An Overview of Exchange-based Commodity Futures Trading1
By Research & Planning Department
Hong Kong Exchange and Clearing Ltd

August 2004

Some 30 exchanges offer commodity futures and options. Trading has expanded in recent years, reflecting the volatility in physical commodity prices, although the expansion of financial derivatives has been even faster. China is an increasingly important market for both the physical commodities and the derivatives.

Commodity futures and options are the oldest derivatives products. Producers and consumers need to hedge against fluctuations in the harvest, and even in early times farmers and merchants made informal agreements among themselves for delivery at pre-arranged prices. The first formal futures markets were the rice exchanges in eighteenth century Japan. Today, commodities are vital to the world economy, and the use of commodity futures continues to grow. However, since the introduction of financial futures in the 1970s, their relative contribution to exchange trading has diminished in importance.

The discussion below is based on the statistics compiled by the US-based Futures Industry Association (FIA).

The FIA's statistics reflect the fact that the global exchange-based derivatives market is now dominated by financials, particularly equity-related products (see Table 1). Traditional commodity futures and options, including precious and non-precious metals, agricultural and energy products, together had a market share in 2003 of only 7.8 per cent, down from 15.8 per cent in 19992.

Table 1: Turnover of exchange-traded derivatives in 1999 and 2003

Sector Turnover 1999 (Mil contracts) % of Total Turnover 2003 (Mil contracts) % of Total
Equity index 521 21.66% 3,961 48.82%
Interest rate 793 32.97% 1,881 23.19%
Individual equities 670 27.86% 1,559 19.21%
Foreign currency/index 41 1.70% 78 0.96%
Sub-total - financials 2,025 84.19% 7,479 92.18%
Agricultural 137 5.70% 234 2.89%
Energy products 117 4.86% 218 2.68%
Non-precious metals 71 2.95% 117 1.44%
Precious metals 55 2.29% 64 0.79%
Sub-total - commodities 380 15.80% 633 7.80%
Total 2,405 100% 8,112 100%

The relative decline in commodities was due not to a shrinking commodity market but merely to a slower growth rate than their financial rivals. As shown in Table 2 and Chart 1, equity-related futures and options expanded substantially during the five-year period. In particular, equity indices futures and options experienced a five-fold increase. The increase of trading volume for commodity futures and options during the period was much smaller.

Table 2: Global trading of exchange-traded derivatives

(Mil contracts) 1999 2000 2001 2002 2003 % change over the period
Equity indices 521 634 1,403 2,791 3,961 660.45%
Interest rate 793 844 1,216 1,478 1,881 137.28%
Individual equities 670 970 1,178 1,355 1,559 132.71%
Foreign currency/index 41 48 49 61 78 87.92%
Agricultural commodities 137 183 155 195 234 70.82%
Energy products 117 198 236 209 218 85.88%
Non-precious metals 71 76 70 75 117 65.69%
Precious metals 55 35 39 51 64 17.93%
Other 1.3 1.3 0.7 0.8 0.6 -51.42%
Total 2,406 2,989 4,347 6,217 8,113 237.21%
Source: Futures Industry Association, US

Click here for a larger image

 
Source: Futures Industry Association, US

The FIA recorded trading data from 62 derivatives exchanges in 2003. Among them, only 30 exchanges traded commodities. Thirteen of these are located in the Asia and Oceanic regions, seven in US and most of the rest in Europe.

The US exchanges are still a major force in the global commodity futures and options market. As a whole, they accounted for 38.7 per cent of global turnover of all exchange-traded commodity derivatives in 2003. They had an even more substantial share in individual commodity products, especially in energy (51.7 per cent) and agricultural products (46.1 per cent) (see Table 3).

Table 3: Global turnover of exchange-traded commodity derivatives - US and non-US exchanges (2003)

(No. of contracts) US exchanges Non-US exchanges Total
Energy 112,396,908 (51.7%) 105,164,337 (48.3%) 217,561,245
Agricultural 107,864,229 (46.1%) 126,532,492 (53.8%) 234,396,721
Precious metals 21,761,743 (33.6%) 42,697,345 (66.2%) 64,459,088
Non-precious metals 3,246,765 (2.8%) 113,901,724 (97.2%) 117,148,489
Total 245,269,645 (38.7%) 388,295,898 (61.3%) 633,565,543
Source: Futures Industry Association, US

As shown in Table 4, the New York Mercantile Exchange had the largest commodity derivatives turnover in 2003; i.e. 137 million contracts or 22 per cent of global turnover of exchange-traded commodity derivatives in that year. It was followed by the Tokyo Commodities Exchange (87 million contracts) and the Dalian Commodities Exchange (74 million contracts).

The FIA statistics also reflected the emergence of China as a major player in the global commodity futures market. Only two of the three commodity exchanges in Mainland China3, namely the Dalian Commodities Exchange and the Shanghai Futures Exchange, were recorded in the FIA statistics. Both exchanges showed impressive growth in 2003. The former recorded a 54.9 per cent rise in its turnover volume while the latter's turnover volume more than doubled (229 per cent). The Dalian Commodities Exchange even overtook the Chicago Board of Trade to become the third largest commodity exchange in the global ranking and the exchange trading the largest number of agricultural contracts (see Table 4) - albeit that Dalian's contracts are much smaller, e.g. its soybean contract is 7 per cent the size of the CBOT's. The increase in China's futures trading no doubt reflects the country's surging consumption of physical commodities to support its rapid economic growth.

It is interesting to note that few commodity exchanges are diversified. The majority of these exchanges (23 of 30) focus on only one commodity type - energy, agricultural, precious metals or non-precious metals.

There is no single exchange dominating commodities trading overall. The leading exchanges in individual commodity products are all different (see Table 5), probably indicating a higher degree of specialisation among commodity exchanges. Moreover, except for agricultural products, there is a high concentration of global turnover in the leading exchange.

Table 4: Turnover of commodity derivatives traded at exchanges, 2002-2003 (number of contracts)

Rank Exchange Cmdty products *key products Turnover of commodity products (contracts) % change
2002 2003
1 NewYork Mercantile Exchange Energy*, precious and non-precious metals 133,744,435 137,225,439 2.60%
2 The Tokyo Commodity Exchange Precious metals*, energy 75,413,190 87,252,219 15.70%
3 Dalian Commodity Exchange China Agri 48,407,404 74,973,493 54.88%
4 Chicago Board Of Trade Agri*, precious metals 66,685,949 72,769,957 9.12%
5 London Metal Exchange Non- precious metals 58,634,004 72,308,327 23.32%
6 Shanghai Futures Exchange Non- precious metals 12,173,083 40,079,750 229.25%
7 Intl Petroleum Exchange UK Energy 30,441,474 33,341,244 9.53%
8 Central Japan Commodity Exchange Precious metals*, energy, non-precious metals, Agri 30,011,863 31,538,530 5.09%
9 New York Board Of Trade Agri 18,554,026 22,171,252 19.50%
10 Tokyo Grain Exchange Agri 18,728,266 21,120,468 5.09%
11 Chicago Mercantile Exchange Agri 7,421,313 8,729,554 17.63%
12 Euronext Liffe, UK Agri 5,224,802 6,206,172 5.09%
13 Osaka Mercantile Exchange Agri*, non-precious metals 5,207,652 6,162,589 18.34%
14 Kansai Commodities Exchange Agri 4,491,954 3,444,296 -23.32%
15 Kansas City Board Of Trade Agri 3,309,359 3,097,414 -6.40%
16 Fukuoka Futures Exchange Agri 3,170,986 2,739,383 -13.61%
17 JSE Securities Exchange, South Africa Safex Agri 1,969,315 2,306,223 17.11%
18 Yokohama Commodity Exchange Agri 1,507,210 1,852,158 22.89%
19 Winnipeg Commodity Exchange Agri 2,193,283 1,842,776 -15.98%
20 Malaysia Derivatives Exchange Berhad Agri 911,015 1,434,713 57.49%
21 Minneapolis Grain Exchange Agri 1,262,769 1,133,731 -10.22%
22 BM&F, Brazil Agri*, precious metals 1,153,121 1,132,414 -1.80%
23 Euronext Paris Agri 385,002 394,915 2.57%
24 MidAmerica Commodity Exchange Agri 483,070 142,298 -70.54%
25 Korea Futures Exchange Precious metals - 56,998 NA
26 Euronext Amsterdam Agri 46,679 41,522 -11.05%
27 Sydney Futures Exchange Agri*, energy 21,246 27,767 30.69%
28 Budapest Commodity Exchange Agri 21,122 22,649 7.23%
29 Mercado A Termino De Rosario (Rofex) Agri 19,374 14,702 -24.11%
30 SIMEX, Singapore Energy 1,282 2,590 102.03%
Total
531,594,248 633,565,543 19.18%
Source: Futures Industry Association, US
* Key product of the respective exchange

Table 5: Concentration in commodity derivatives trading (2003)

(No. of contracts) The leading exchange Turnover % of global total
Energy New York Mercantile Exchange, US 112,396,908 51.7%
Agricultural Dalian Commodity Exchange, China 74,973,493 32.0%
Precious metals The Tokyo Commodity Exchange, Japan 42,285,608 65.6%
Non-precious metals London Metal Exchange, UK 72,308,327 61.7%
Source: Futures Industry Association, US

In terms of commodity products, agricultural products (38 per cent) and energy products (34 per cent) took the lead in the global exchanges' total turnover in 2003. They were followed by non-precious metals (18 per cent) and precious metals (10 per cent) (see Chart 2 and 3).

Click here for a larger image

Source: Futures Industry Association, US

Click here for a larger image

Source: Futures Industry Association, US

1This article first appeared in the July 2004 issue of Exchange.

2Derivatives exchange turnover is customarily measured in number of contracts traded. However, it should be noted that the notional values of different contracts may vary greatly.

3The Zhengzhou Commodities Exchange, which trades green bean and wheat, is not covered by FIA statistics.


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