All that glitters: The commodities market sees strong growth

While the equities story in Dubai has been one of gradual recovery since the global downturn, on the commodities side, the emirate has been going from strength to strength. Central in this has been the success of the Dubai Multi Commodities Centre (DMCC), the licensing authority for the Jumeirah Lakes Towers Free Zone. Since its establishment in 2002, the centre has become a one-stop-shop for the diamonds, precious metals and commodities trade. Within the zone, everything is provided – gold-smelting facilities, diamond labs, and the Dubai Gold and Commodities Exchange (DGCX).

LOCATION BENEFITS: The DGCX – and the DMCC more generally – has been able to capitalise on Dubai’s location. The geographical facts have been crucial because they have allowed Dubai to act as a three-way junction between finance and investment in Europe, suppliers of diamonds and precious metals in Africa, and the thriving commodities and gold market in India. “Today we see 18-20% of the global gold trade comes through Dubai,” Ahmed Bin Sulayem, the executive chairman of the DMCC and chairman of the DGCX, told OBG.

Dubai’s mix of over 200 nationalities in residence provides access to multiple sources of financing, while the non-tax environment in the emirate also makes it an attractive place to do business, as opposed to Europe or India. The latter country has proved particularly crucial in the formula that has brought the DGCX success. “When India launched an Indian-rupee contract, back in 2010,” Pradeep Unni, senior relationship manager for Richcomm Global Services at the DMCC, told OBG, “that was when the DGCX really took off.”

DGCX STEPS IN: That year, the DGCX, which had begun operations in 2005, began launching the same rupee contracts as the National Commodity and Derivatives Exchange in Mumbai, with price differentials allowing for arbitrage. The DGCX, which has operated in partnership with Financial Technologies India and the Multi-Commodity Exchange of India, was well positioned to benefit from the surge in Indian rupee futures and commodities trading, as global interest in the rupee and in gold surged. The DGCX had also changed its working hours at that time, in order to remain open throughout the South Asia exchanges trading day, The exchange is also opening on Fridays to keep pace with international markets. When these moves combined with global volatility – and thus increased investor appetite for safe havens like gold and derivatives to hedge against risk – the results were dramatic.

DRIVERS: At the end of 2009, the exchange reported a good year – 1.5m contracts worth $79bn registered over in 12 months. By the end of 2010, annual volume had grown 28%, to 1.93m contracts, while the value of these had gone up 32%, to $104.18bn. Even these robust figures were eclipsed by 2011’s performance, with the year seeing an astonishing 110% numerical growth to 4.04m contracts worth a total of $185.13bn, or 77.8% growth by value. 2012 annual trading volumes on the DGCX registered a substantial growth of 137% from 2011 to reach 9.6m contracts, valued at $372.83bn.

As a further measure of the exchange’s popularity, the Open Interest index for the DCGX exceeded 15,000 for the first time in the final quarter of 2011, after hovering around 4000 during 2010. Throughout 2012 the results continued to be good. The number of contracts traded in October alone was 1.057m – up 148% on October 2011 and valued at $43.07bn.

Currency futures have accounted for much of the DCGX’s growth, with the exchange not only offering Indian rupee/US dollar contracts, but contracts in euros, yen, sterling, Australian and Canadian dollars, and Swiss francs. In 2012 currencies were the highest performers in terms of volume, accounting for 93% of all contracts. The Indian rupee dominated, however, at 8.64m contracts out of a currency contract total of 9.02m.

The second-largest grouping by volume in 2012 was precious metals, with the DGCX trading gold and silver contracts. Of the 562,620 precious metals contracts issued, gold saw the strongest growth, up 42% in contract volume terms from 2011, at 552,001 contracts. Currencies and precious metals accounted for all the trading in 2012 too, although nowadays, the DGCX also hosts base metal contracts in copper and steel rebar, energy contracts in WTI Light Sweet Crude Oil, Brent Crude Oil and Fujairah 380 CSR Fuel Oil, and options on gold and Indian rupee futures. Indeed, according to Iskandar Najjar, the CEO of Alpari, a company that is active in online forex trading, “Investors in Dubai and the surrounding region are exceptionally knowledgeable about commodities, particularly gold, silver and oil. As a result there was a natural gravitation towards and acceptance of these types of commodities trading mechanisms.” The exchange’s figures for October 2012 showed that some of these products had also made good progress. Debuted in late April 2012, copper futures saw 15,582 contracts in just seven days of trading during the month, rising to 35,183 in May, before falling to 21,391 in June – a still respectable figure for a new product. Gold, however, remains the exchange’s most popular metal, with the June 2012 figures showing a 111% growth in volumes of gold futures contracts traded year-on-year.

OTHERS TO FOLLOW: Plans are also in the pipeline for other commodities futures to be traded on the DGCX, which remains the only exchange in the Gulf to offer the local clearing and settling of contracts. These new lines of business may involve indices, emerging market currencies and agricultural products, with the Gulf nations major importers of grain and rice. Further growth was seen in 2012, with a new trading platform due to come on-line by the end of the first quarter of 2013. Partner Cinnober Financial Technology will provide the infrastructure to support this technology.

DIAMONDS ARE FOREVER: At the same time, the DMCC is playing a major role in other parts of the global commodities business – notably in precious stones. The Dubai Diamond Exchange (DDE), a DMCC subsidiary, was set up in 2004 and now has 600 regional and international precious stones and diamond companies registered with it, according to its reports.

The exchange is now the fourth-largest diamond trading centre in the world, and the largest in the Middle East, with the diamond trading volume in Dubai reaching $35bn in 2010, and climbing to approximately $39bn in 2011, according to DMCC figures. Prior to the establishment of the DMCC, the annual trade in Dubai was around $3m. Again, geographical location, advantageous working hours and a business-friendly ecosphere are the major factors behind this growth, along with the growing global interest in diamonds at a time of economic uncertainty. The DDE is not only trading in refined products, but is also a centre for rough and polished diamonds. The International Gemological Institute conducts certification, while the Gemological Institute of America trains and certifies future certifiers. The UAE was also the first Arab country to sign up to the Kimberley Process Certification Scheme, which aims to prevent conflict diamonds from entering the global market. The DMCC is expected to continue to expand and the DGCX seeks to raise its profile globally by diversifying its product base and adding technological improvements, as the trading of gold and diamonds is likely to benefit from global volatility.