Commodity market is a new concept for many investors in Pakistan.
Commodity market is a new concept for many investors in Pakistan. However, it has already started to gain momentum in the country as the chances of manipulation in internationally traded commodities and currencies are next to zero.
Abdullah Shah Bokhari, the CEO of Enrichers, having the largest market share in Pakistan in commodity and currency trading industry, is very optimistic about the future of commodity trading in Pakistan. Here are some excerpts from his interview with The News.
Q: What is the difference between the Commodity Exchange and the Stock Exchange?
A: A commodity refers to a generic form of a product that is very basic and undifferentiated. On the other hand, equity refers to some form of capital that is invested into a business or an asset that represents ownership held in a business. In the context of stock and commodity exchanges, commodities are traded on a commodities exchange through futures and forwards.
While, equity refers to shares that are traded on a stock exchange and represent an ownership interest when purchased. Commodity trades are shorter termed and focused on making profits through price changes, and equity investments are usually made for a longer period, with a focus on ownership in a successful firm.
The price of the futures or forward contracts will depend on the value of the commodity at the time of trading and a futures or forward contract will act as an agreement to buy or sell a specified quantity of the commodity at an agreed price. The trader in this instance actually does not seek to purchase the commodity, rather makes a profit from the price fluctuations.
Q: What is the future of commodity trading in Pakistan?
A: Commodity trading was in vogue before the establishment of Pakistan Mercantile Exchange (PMEX), but it was unregulated. The interests of the investors were not protected and many unscrupulous operators fleeced the investors by closing their shops abruptly and leaving no trace behind. In that way, many people lost billions of rupees.
Modern commodity trading in Pakistan is still in its infancy. The number of investors, however, is steadily increasing as they experience the transparency in this trade. It provides a fair opportunity to investors without the fear of being cheated by the manipulators. Since, the trading rules are fully compliant with the highest global regulations; the chances of manipulation so often witnessed in capital market are almost zero.
PMEX has provided a transparent and a regulated platform to the investors, whose interests are fully protected. The rules of trading have been laid down and no broker can deviate from these rules. The accounts of the clients of registered commodity brokers are also operated through the PMEX.
Q: What commodities are usually traded through PMEX and how many local commodities are traded?
A: Most of the trading is in the international commodities. The local agricultural commodities offered for trade include wheat, sugar and rice. However, there is a mismatch of prices of these commodities, as they are not synchronized with the global prices. The prices of wheat in domestic markets, for instance, are higher than the international market. Similarly, the rates of sugar in domestic market are higher than the global sugar rates.
Crude oil, gold and silver are the most traded and most liquid commodities that are traded through PMEX. Most of the trading is in futures, but in the case of gold, physical delivery is also arranged by the PMEX. All these commodities are highly liquid which provides vigilant and prudent investors opportunity to liquidate their stocks at an opportune moment.
Q: Has the permission of currency trading increased investors’ response?
A: Currency trading now accounts for almost 40 percent of the total trading at the PMEX. Of the remaining 60 percent, gold accounts for 55 percent, crude oil 40 percent and silver 5.0 percent of the total trading. The currency trading has only recently been allowed by the PMEX.
Currently, trading is permitted in Yen, Euro, Pound and Dollar, as these four are the most actively traded currencies in the world, accounting for more than 50 percent of the total volume traded in the international currency market. Now, investors have the opportunity to speculate against these currencies and the businessmen can hedge the dollar value against their imports and exports.
Q: How can one proceed with trading at Commodity exchange?
A: There are only 61 active brokers in the PMEX, who can trade in all commodities offered by the exchange including gold. There are some members that are registered only to trade in gold. An investor has to open an account through member broker. The PMEX will act as a watchdog for the investors in this case.
Q: What is the average daily amount that is traded in the commodity market?
A: Commodity trade, as I have stated earlier, is slowly picking pace. The current average trading amounts to around Rs 5 billion, which comes to around $50 million. Though, it is nothing if compared with the turnover in the stock market. The trading will pick up as the investors realize the benefits of currency trading for their businesses.
Importers would be able to hedge dollar whenever rupee comes under pressure. This will give their businesses the stability needed. Similarly, if the rupee is strengthening, the exporters could hedge their export proceeds against increase in rupee value.
We all know that exporters suffered heavy losses when rupee strengthened against US dollar last year by 8.0 percent from Rs106 against to Rs98 against US dollar. The exporters lost millions on each consignment as the export proceeds were realized at strengthened rupee value. Had they hedged the currency, there would have been no loss.
Q: What is your advice to the investors?
A: Commodity and currency business demands that the investors are always alert. We are in the international trading and the commodity markets are active 24 hours a day in different parts of the world. We open at 9 am, at that time the markets in Far Eastern countries including Hong Kong and Japan have conducted around three hours of trading. In Australia, the market opens even earlier. However, Europe opens three hours after Pakistan and by the time the US market opens it is already night time in Pakistan. Most commodity traders operate till midnight to cover movements of all markets.
To protect our clients, we equip them with a special app that keeps them abreast with the changes in the market round the clock. The special software enables them to buy and sell commodities from their accounts round the clock. Moreover, special alerts keep them informed about movements of the commodity of their interest.
The writer is a staff member
