Discussions
Promoting regional integration through commodity exchange markets
Taku Fundira, tralac Researcher, discusses the promotion of regional integration through commodity exchange markets
The global trading environment has become ever more competitive and for countries to compete in a globalised environment calls for the development and establishment of industries that are globally competitive. For Africa, regional integration remains the key strategy for African governments to “accelerate the transformation of their fragmented small economies, expand their markets, widen the region’s economic space, and reap the benefits of economies of scale for production and trade, thereby maximizing the welfare of their nations” (UNECA, 2010).
The Southern and Eastern regional economic communities (RECs) of the Common Market for East and Southern Africa (COMESA); the East African Community (EAC) and the Southern African Development Community (SADC) are currently negotiating for the establishment of an expanded free trade agreement (FTA), the COMESA-EAC-SADC FTA also referred to as the tripartite FTA (TFTA). Amongst the goals of the TFTA is to increase intra-regional trade and capitalise on opportunities that arise from the establishment of an extended market. In the current trading environment within the TFTA, extra-regional trade outstrips intra-regional trade.
tralac recently attended and participated at a workshop on Promoting Commodity Market Exchanges in the SADC Region, organised by the UN Economic Commission for Africa (Southern Region Office) where reasons identified for the low intra-regional trade included among others:
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reliance on exports of raw materials and intermediate goods;
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failure by member States to meet tariff reduction requirements;
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rising commodity prices;
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existence of other forms of barriers as well as the challenges relating to weak manufacturing capacity;
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poor physical infrastructure; and
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unresponsive supply side bottlenecks.
It was noted that there was a need to ensure that this gap between extra-regional and intra-regional trade is reduced through an appropriate design of trade facilitating institutions that will support existing investment and trade protocols in the region. The development of commodity exchanges as a means of expanding market space for trading commodities was regarded as one way of addressing some of these challenges. This is mainly because in the sub-region, exports are predominantly primary and unprocessed goods consisting of oil, minerals and agricultural goods. Furthermore SADC for instance is also a significant global producer of metals including vanadium, platinum, chromite, gold, copper, diamonds and cobalt. Thus reliance on exports of such commodities by countries in the sub region provides an opportunity for the development of commodity markets with the aim of triggering massive improvements in infrastructure and financing arrangements of commodity value chains and competitiveness for international trade (UNECA, 2013).
In this regard, national commodity exchanges can play a critical role in facilitating trade and acting as a catalyst for growth in a number of related industries such as transport, banking, logistics, financing, insurance and telecommunications which benefit from such exchanges. According to Rashid et al (2010), the purposes served by a commodities exchange depend in part on the nature of the specific contracts that are traded. “By simply centralizing trade in a certain commodity, an exchange can facilitate title transfer, market transparency, and price discovery.” This would result in a reduction in transaction costs because the costs associated with identifying market outlets, physically inspecting product quality, and finding buyers or sellers are coordinated through a centralized exchange. By reducing transactions costs and enhancing the flow of information, an exchange can improve returns to market agents while reducing short-term price variability and spatial price dispersion. Thus the importance of commodity exchanges cannot be overemphasised.
At the regional level, currently there is no regional commodity exchange; however stock exchanges have proliferated since early 1990s. Looking at the national level, there exist countries with commodity exchanges and others that are now moving towards establishing commodity market exchanges. In SADC, the following can be noted:
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Zambia has an established commodities exchange and is also expected to launch a second exchange with bond and derivatives transactions for several commodities including copper, cobalt, gold and agricultural produce.
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Malawi is in the process of rolling out a commodity exchange mainly targeting buying and selling of agricultural goods.
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Tanzania in 2011 commenced plans to establish a commodity exchange, with the process of reviewing the regulatory framework for commodity trading by the Bank of Tanzania.
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Zimbabwe launched a commodity exchange in 2011 but it is not yet functional due to funding challenges.
Amongst the objectives of the workshop was to propose and explore the idea of a regional commodities exchange. The proposed commodities exchange would link national commodity markets which ultimately will lead to immense benefits for the sub region through economies of scale as countries reduce transaction costs associated with uncoordinated individual markets. Developing a regional commodity exchange, while noble, is fraught with a lot of challenges, as is common when dealing with issues that require cross border linkages. Therefore the questions to ask are: What structure or form, will such an exchange take? Will it have a physical location or merely a linking platform of existing national commodity exchanges? Will the regional exchange cater for all countries in the region? How will issues related to foreign exchange regulation and other regulations in general be addressed?
These are some questions that need to be discussed before such an idea can be implemented.
Sources:
Rashid, S. Winter-Nelson, A. Garcia, P. 2010. Purpose and Potential for Commodity Exchanges in African Economies. IFPRI Discussion Paper 01035, November 2010, International Food Policy Research Institute.
UNECA 2010. Assessing Regional Integration in Africa IV: Enhancing Intra-African Trade, Economic Commission for Africa, Addis Ababa. Available at: http://www.uneca.org/publications/assessing-regional-integration-africa-iv
UNECA 2013. Aide Memoire – Ad Hoc Expert Group Meeting on Regional Integration in Southern Africa: Promoting Commodity Market Exchanges in the SADC Region. Workshop held in Johannesburg, 21-22 February 2013.
Comments received:
Cuan Opperman, 28 February 2013 09:49 AM: “Over the last couple of years I have done extensive work with ZAMACE in Zambia and ACE in Malawi. There is substantial potential for these exchanges (including the proposed relaunch of ZIMACE in Zimbabwe).
SAFEX will shortly be offering dollar based Lusaka contracts. The key challenges they face are access to quality assured storage (which provides the buyer with the confidence to purchase the commodity remotely) and arbitrary administrative export bans on particularly soya and maize.
On the storage side the exchanges have started to get their warehouse certification schemes in place though training of warehouse managers remains a major constraint.
Addressing these constraints does not necessarily require another institution to be set up. Some seed funding for storage infrastructure improvement and commodity management training is all that is really required. An agency such as UNECA could also play a role in highlighting the economic cost (and depressing production) of export bans to the Governments involved.”
Gbadebo Olusegun Odularu, 05 March 2013 09:01 AM: “Promoting regional integration through commodity exchange markets is indeed a much awaited initiative for Africa. This should adopt both a physical and electronic platform and it should comprise a network of existing/functional national commodity exchanges, as new ones are being developed. As such, COMESA, EAC and SADC will play a strategically significant role in order to make this happen, and especially as the East and Southern Africa looks forward to establishing an expanded tripartite free trade agreement – TFTA.
Again, I think Trademark Southern Africa (TMSA) should be brought on the platform in order to speedily foster regional integration through the optimization of commodity exchange market policy space. In addition, the Alliance for Commodity Trade in Eastern and Southern Africa – ACTESA (http://www.actesacomesa.org/) seems to be doing a lot along this direction, being part of its core mandate.”