Commodities exchange of the year: SGX Commodities

Since the launch of SGX AsiaClear, Asia’s first over-the-counter clearing platform for traded derivatives in 2006, SGX has developed a suite of derivatives products focused on seaborne Asian trade flows, covering iron ore, coking coal, steel, freight, rubber and energy metals. The strong synergies between these commodities gave rise to SGX Commodities’ pioneering ‘virtual steel mill’ and ‘virtual transport and car complex’ – concepts that today offer physical participants a one-stop venue for price discovery and risk management across the global steel and automobile value chain.

This has created end-to-end synergies for participants along the entire value chain, with the ability to manage upstream and downstream price volatility, while benefiting from margin efficiencies when they trade across products in one venue.

As a risk management hub serving international markets, SGX offers the longest derivatives trading hours in Asia, spanning the eastern and western markets, providing year-round access across time zones for physical market participants to manage price risks – especially amid heightened volatility. This was especially vital in 2021, when global commodities markets saw extreme volatility exacerbated by Covid-19 pandemic-related supply chain disruptions, marking the sharpest uptrend in more than a decade.

When iron ore prices were highly volatile and derivatives volumes were surging, SGX ensured its markets remained fair, orderly and transparent, and the exchange worked closely with its clients as they sought to manage risks at a trusted and liquid venue with effective price discovery.

Since the launch of its world-first iron ore swaps in 2009, SGX Commodities’ iron ore complex has seen explosive growth in volumes and market participation. Today, with a nearly 100% market share, SGX is the undisputed venue of choice across seaborne iron ore derivatives, coking coal derivatives and dry-bulk forward freight agreements (FFAs), driven by its market-centric product, platform and risk management offerings. SGX’s iron ore derivatives volume hit a new high of more than 2.2 billion tonnes in 2021, surpassing the size of the underlying physical market as iron ore continued to gain prominence as a proxy for the global economy.

In May 2021, SGX completed its virtual steel mill with the launch of the world’s only US dollar-denominated Shanghai rebar derivatives contract, further driving capital efficiencies for participants across the entire steel value chain and providing international investors access to China’s steel market. This was a significant move as Shanghai rebar prices are tracked closely by investors worldwide as an indicator of the health of the Chinese economy.

Iron ore has become Asia’s first truly global commodity, increasingly following in the footsteps of the oil complex in terms of size and economic importance. SGX’s deeply liquid iron ore market has transformed it into a financialised commodity traded for its role as an economic bellwether. As iron ore continues to gain prominence as a global investment tool and portfolio diversifier, to support its evolving role as a macro proxy, index providers have launched new indexes based on SGX contracts and its published reference prices. The importance of SGX’s iron ore contracts also resulted in iron ore’s inclusion in numerous S&P GSCIs, including the Industrial Metals Index and the recently launched Electric Vehicle Metals Index.

In dry-bulk shipping, SGX Commodities’ FFA market share has grown in recent years to more than 70% today, as clients continue to be drawn by the exchange’s deep liquidity and capital-efficient offering across seaborne dry-bulk commodities and freight.

Baltic Exchange, a subsidiary of the SGX Group, the world’s only independent source of maritime market information for the trading and settlement of physical and derivatives contracts, has also been pushing boundaries, working with partners to launch new indexes around container shipping and air freight.

In supporting global industries’ energy transition to achieve net zero, SGX Commodities worked closely with industry stakeholders to develop greener derivatives contracts, such as the world-first high-grade iron ore derivatives, low-sulphur fuel oil and methanol derivatives, and, more recently, a new suite of derivatives for energy metals used in the production of electric car batteries.

In 2018, SGX launched the world’s first high-grade iron ore derivatives to meet demand for new risk management tools amid a structural shift in China’s environmental policy. The launch was timely as the steel industry was beginning its decarbonisation journey with China’s pursuit for environmentally friendly growth. High-grade iron ore is now increasingly sought after by steel mills to achieve higher-quality production with lower emissions.

More recently, in September 2022, SGX Commodities launched a suite of commodities contracts for four raw battery materials: cobalt metal, cobalt hydroxide, lithium carbonate and lithium hydroxide, providing unique capital efficiencies in the form of a virtual car complex, alongside SGX’s global rubber benchmark, for market participants to undertake price risk management of key raw materials used in the car production process.