As commodity market participants look ahead to 2020, perhaps the only thing they can be sure of is uncertainty.
That was the theme at a panel discussion Dec. 4 at FIA's Asia 2019 conference in Singapore, which touched on trade tensions between the U.S. and China, shifting demand for products and the broader opening of Chinese financial and derivatives markets to the rest of the world.
Cecelia Zhong, an expert on the financial industry's efforts to develop business in China, pointed to former U.S. Treasury Secretary Henry Paulson's recent comments about an "economic iron curtain" and she said that trade tensions between the U.S. and China—and related uncertainty for commodity markets—are unlikely to resolve any time soon.
"I'm afraid the picture is not that pretty," said Zhong, who worked at Hong Kong Exchanges and Clearing and the New York Stock Exchange before joining Guojin Metal Technology, a Shanghai-based financial technology company, in 2017. "Conditions for commodities, physical and financial products that include derivatives, are looking much more complex and uncertain and volatile."
William Fyfe, head of Singapore for the London Metal Exchange, echoed these concerns. He noted that the exchange's annual LME Week gathering of the global metals community in London commonly is characterized by a shared consensus view of the year ahead, where participants agree that "things are either looking up or things are looking terrible." However, he noted that at this year's event "you had a real mixture of opinion" across the industry, which indicates how difficult it is to predict how things will play out in 2020.
Regardless of how the near-term trade disputes resolve, it is importantly to recognize that the landscape for commodity markets will be forever altered, said Brett Cooper, head of Asia commodities for INTL FCStone, a futures brokerage based in the U.S. that recently moved to expand its business in Asia.
"We'll never go back to what the original status quo was," Cooper said. "Even prior to this year, China had been very conscious on not having too much reliance on single suppliers for the commodities they need, including making some hard decisions on what they will be self-sufficient in. This really has been five to 10 years in the making, and the trade issues are just speeding up the effort."
New products and opportunities
Julius Foo, head of energy for Asia-Pacific at Intercontinental Exchange, noted that uncertainty caused in part by trade tensions shouldn't dampen optimism over the opportunities in new products or markets, however.
"From ICE's perspective, there's always uncertainty," Foo said. "It can be the result of geopolitical risk or shifts in supply-demand dynamics or regulations and public sector policies. So the key is really to stay close to our customers and find out what they need to manage that uncertainty and risk."
Foo noted that there are corners of the energy market that are thriving, including natural gas markets that continue to ride an uptrend caused by liberalization in Europe and elsewhere. He pointed to the Dutch TTF gas future listed on ICE Endex, which have become the most liquid European natural gas benchmark, and ICE's JKM LNG future, which has seen volume surge 220% year-over-year.
He also noted that headaches for some suppliers become opportunities for others amid the "fragmenting of bilateral trading relationships as people look for other sources of supply." He pointed to Chinese companies connecting to markets across Southeast Asia including Malaysia and Vietnam as proof of this trend.
And naturally, all of this activity creates constant demand for derivatives to help hedge commodity risk.
Peter Zaman, a partner in the Singapore office of the law firm Reed Smith, noted that a year ago he noticed "hesitation or smaller risk appetite" from some clients. "But now, people have realized they have to get on with things despite the uncertainty," he said. "That has sparked increased interest in derivative products as a risk management tool."
Opening of China
Perhaps the biggest opportunity of all, of course, is the fact that China continues to open up access to global financial markets despite recent uncertainty regarding tariffs and trade.
Guojin's Zhong noted that she has worked at three international exchanges over 15 years, and for all of them "China is the ultimate goal."
The opportunity is massive, she said, and comes in two parts: international firms coming in, and Chinese commodity and derivatives market participants reaching out to the rest of the world.
Regarding firms entering China, she noted recent plans to allow 100% foreign ownership of financial firms starting in 2020. And regarding domestic opportunities that will benefit from going abroad, she noted that there are plans for more internationally accessible contracts in 2020.
The opening of China has been a long-time coming, and still requires much work by both the private and public sector, said INTL FCStone's Cooper. But he noted that the transition is natural and inevitable.
"If you go back in history and look at the major commodity exchanges and marketplaces, they started as destination markets not origin markets. So philosophically, there is a lot of room for more solutions to manage risk and share in the growth in this part of the world," Cooper said.