Commodities have shown tremendous price volatility through the period of global crisis in the past two years — whether gold, metals, oil or agricultural. How much has that affected the progress of DMCC as a commodity trading hub and its affiliates in terms of volumes and trading patterns?
Price volatility is inherent in all markets. This volatility provides opportunities for traders to make profits, and it also creates a need for market institutions to offer facilities for traders to manage price risks.
Coming to Dubai Multi Commodities Centre (DMCC), we are lucky to have the DGCX operational. Volumes have increased year on year, month on month on DGCX — that gives an indication of where things are. Total volume for the month of September witnessed a six per cent rise to 96,292 contracts. The six per cent growth was valued at $4.6 billion (Dh16.9 billion), and was driven mainly by currency and crude oil futures contracts.
Unfortunately, volatility [globally] over the past 12-18 months has been so extreme that it has created something of a disincentive to traders, particularly in emerging markets such as those offered by DMCC. Some members have been badly hit, but there are some who have made money. There are brokers and members who joined the DGCX, and they are still supporting the exchange, doing the volumes — and we expect more volumes going forward in 2010.
We launched the fund of funds projects [with] the Dubai Sharia Asset Management (DSAM) gold and natural resources funds, [which] were up 51.5 per cent and 1.0 per cent at end-September respectively year-to-date. When we launched, fund managers thought we were mad; they were having nightmares.
We said: “This is different. This is not stock, this is not blue-chip. This is [a] Sharia-compliant commodity, and the mechanics are different.” Yes, these may go down a little bit, but we believe that the worst is behind us.
You are a facilitator for both physical trading as well as providing a trading platform for futures contracts in the form of DGCX. What are some of the concerns of traders as they ride out the crisis?
They vary. Some are happy, doing business, taking opportunities. I know a few who are complaining, who had stocks which they wanted to sell and they weren’t agreeing on a specific price. Now they are running after that same client for half that price and that client doesn’t want to buy. Tables have turned. The biggest risk is basically staying idle, waiting for things to go back to 2006 or 2005. If that’s the business plan for such traders, they are doomed. You have to fit into this new market.
DMCC has moved to permanent premises in Jumeirah Lake Towers and new companies have moved in here this year. How are things in terms of attracting companies and traders? Are there others reluctant to follow, for financial reasons?
Owners of buildings in DMCC might not like the story of prices going down, but somebody’s misfortune is somebody else’s fortune. It’s a free zone, and it’s a flexible community here — offices, rents — it’s the hottest spot in Dubai at this stage.
I think it is the most underestimated project in Dubai. People don’t know the value of this project. Reliance [came] two years back, the Pulses Association moved from Paris to Dubai — now that’s the statement for 2009, if you will. The story still goes on, with the year that everybody wants to forget and the year that everybody wants to look forward to, which is 2010.
And DMCC is still progressing. We have the right size, [though] maybe we have to change some of our plans going forward.
What do you think is the right number of companies to help you achieve ‘critical mass’ for your business?
I wish I could benchmark DMCC to compare against other projects. Now with all the towers completed, the Gold Tower is filled. We were selective about [who is occupying] the Silver Tower.
It is about getting the companies moving in. There was always the question whether to have them leasing, and have recurring revenue. That would have been the biggest headache, given recession, because nobody would have leased.
Now the pressure is on the owners themselves — either they operate, or sell it to another DMCC company that wants to operate. That is what is happening. Week after week we have new companies coming: Antwerp Diamond Bank, Avigo Capital Partners (sponsored by Lord Bagri of the UK), Rosy Blue, SBMH Diamonds. These are big names.
The issue of banking liquidity has been a feature of the financial crisis. Would you say that the constraint on lending had a knock-on effect on commodities trading here?
There is an irony in the point you raise.
We launched the Dubai Gold Receipts, which migrated to Dubai Commodity Receipts, and have now become Global Multi-Commodity Receipts [a means of facilitating physical trading and finance]. There is only one reason for that, which is to add more credit to the commodity industry.
The commodity traders never had credit, or enough credit, because banks never understood their business and could not take their commodities as collateral. So it was a terrible crisis, and right now it’s the solution to get around it.
We have had one transaction that had diamonds — we have done rice, sugar, steel, textiles, through the receipt system. Traders and bankers who have used this system (global multi commodity receipts) didn’t do it for fun. They did it out of necessity.
Can we review the financial situation of DMCC as part of the Dubai government, since DMCC’s rating was cut in June by S&P? Could it affect funding?
Ratings are an external opinion. At this stage, I can tell you I have never been more proud of Dubai and DMCC in my life than I am right now. To know that we have gone through this storm and I am in this building and I am seeing companies coming and going, it’s a huge statement. Because the talks have been basically that the real, big players will show up after the storm. Rating [cuts are] not just a Dubai story; it’s a global story right now.
At this stage we are just capturing businesses, companies and associations. Whether we are going to need funding or not is not the issue right now because the work we are doing is making the community the hub which we promised. We are registering and licensing companies, our exchanges are still operational.
Things have been challenging in 2009, [but] the most challenging time was 2002, not 2009. In fact the most relaxing time is right now, because I know who’s who, what’s what, where things are, which bank is really a bank, for example; the men have been separated from the boys. We know who the real partners are, who are standing with us, who is not.
How do you compare yourself with other global centres, and where does Dubai as a hub fit in?
The DMCC Free Zone is the first dedicated commodities free zone in the region, well located in a convenient time zone between Singapore and London, and well positioned to complement both Singapore and London in offering access to an established commodities market between the Far East and Europe.
Also, the major commodities markets in Asia such as in India and China are closed to external participants.
I can simplify it in a number of ways. You can look at it as an expansion for Indian traders who want to do trade in Dubai and move away from paying taxes in India. You can look at it also as a hub for Saudis who have been trading in London but paying too much taxes. This is in a free zone and they would come here for that very reason. Also, you can see this as an arbitration opportunity between the same type of contract and exchanges in the US and Europe.
So DMCC Free Zone can be used for different reasons. This is the only one in the Middle East, and the most trusted one, and with the most volumes. But our eye is not on being number one in the Middle East, but to be number one globally. We want to compete with the big boys who took a century to establish themselves.
I would compare ourselves a little bit to Guangzhou (in China). They have Worldmart (an international jewellery trading platform), and we have signed an MOU with them where we could work with our members and they would have access to our services. The last diamond summit that we had was the China-Middle East Summit.
It was focused very much on that. It really is in line with where the global economy is going right now. The leader was the US.
Now the world wants China to lead — wants India, Russia, to lead. What will it take to be up with the big boys, as you put it?
It will take not missing opportunities: sitting and not moving, not capturing the opportunities that will be available. That would kill the progress.
I will give you an example. We launched the DGCX. Not once before we launched DGCX did we mention currency futures. We played with the idea. David Rutledge brought the idea. Our Indian partners thought it was wishful thinking, saying regulators won’t accept it. We said there is a process, and we met the ESCA, we met with the Central Bank. And, guess what — what was impossible became possible.
You now have two exchanges in one: currency exchange and commodities exchange. We would have launched the Dubai Gold Securities on DGCX had the technology been able to facilitate that. But the technology couldn’t do it, and so we launched it on our sister company Nasdaq Dubai. The most important thing is to have the right attitude.
Can you actually create the opportunities, more like pre-empting opportunities?
One of the good things that has come out of recession is [discovering] the number of people you can take at their word, the number of people you can depend on; those with the right sensibility and who are realistic. So we know whom to deal with now. Actually, I see more opportunities going forward than before. Yes, less credit, less cash, but more tangible opportunities.
DMCC is a majority shareholder of DGCX. Given that derivatives products came under scrutiny during the global crisis and regulators have expressed concern, would Dubai suffer?
Where is that happening? In the US. You know what’s happening in the US. It’s not just about buying and selling; it’s not about demand and supply there. It’s getting tougher there. It’s coming to a point where it’s not worth trading under the regulations. It’s not worth it especially for the Saudi traders, GCC traders — people who get flagged for their names and their regions.
If that’s how tough things are there, that means more opportunities for DGCX, for new markets such as Dubai and Singapore. This [Dubai] is still an untapped market. Diamond trade went up from a few million to $20 billion in a couple of years and this is not a joke; this is serious. The companies are saying: “I have had it with Antwerp, I am moving to Dubai,” “I have had it with New York, I want to move to Dubai,” and “I am an Arab, I want to move to Dubai.”
Yet DGCX is still retail-dominated. Though some institutional players have come in, why do you think they have been slow so far?
That’s the stage we’re at. DGCX is moving towards institutional [business]. The gaps are there, and obvious. If you talk to brokers, they will tell you they need more market-makers. It could also be a technology matter. All I know is that [DGCX] is shifting to include the institutional, shifting to make that investment and put the technology and support that’s needed to handle the institutional investors.
DGCX has attracted attention and participation from both retail and institutional investors. Innovative product offerings such as Rupee Futures and WTI crude oil futures have helped establish the exchange regionally.
As for institutional players, our list of members boasts top players such as Deutsche Bank, JP Morgan, HSBC, ENBD, Newedge Group, MF Global among others. It’s the combination of the right product, right time and right place that has made DGCX the market of choice in the region.
What about futures contracts in the pipeline? What’s under review?
You must appreciate that DGCX is being run not by brokers. If it was run by brokers, you could add three or four zeroes to the volumes. That’s part of why there are challenges in the US — the major brokers are at the centre, and they won it.
[Here] there will be more volume, more contracts; we are looking at some. In the next few months if we do something, I can assure you those things will have been sought by traders. We are not going to put them out to test the waters.
Interview by Gaurav Ghose, Financial Features Editor, Gulf News
