Commodity bourse: two-sided coin

Opening a commodity exchange in Korea similar to the Chicago Mercantile Exchange will offer both benefits and risks to the Korean economy, analysts said yesterday.

They said the trading futures of gold and other precious metals through a commodity exchange will enhance transparency and reduce costs for investors.

At the same time, however, the analysts pointed out that a small-sized local market could be easily swayed by overseas speculators.

On Wednesday, the Finance Ministry said it was working on plans to open a commodity exchange as early as 2011 as part of efforts to bring out the largely underground gold transactions into an open market and help investors make diverse investments in commodity futures, including grains and other raw materials.



"We will have to review it more thoroughly, but opening of a commodity exchange will be possible in 2011 at the earliest," Deputy Finance Minister Noh Dae-lae told reporters in Gwacheon after a weekly government meeting. "Government officials shared the view that Korea fell behind in establishing a commodity exchange."

The envisaged commodity exchange may be set in Jeolla Province, possibly Saemangeum or Gwangju, industry sources said. Noh did not comment on the possible location.

Daewoo Securities analyst Son Jae-hyun said establishment of a commodity exchange would enhance transparency in trading gold and other commodities. "Even though gold futures are currently on the bourse, the trading hasn`t been very active because of illegal smuggling of gold into the black market," Son said.

Industry watchers said 70 percent of gold transactions in Korea are made on the black market.

"Investors will be able to rely on more transparent and direct information through the commodity exchange, if established," he said.

Tong Yang Investment Bank analyst Lee Jung-ho`s view was similar to Son`s, saying local investors would benefit from reduced costs in commodities transactions.

"Local investors have been heavily reliant on overseas direct investments when it comes to commodities futures trading. As some of them will turn back to the local market, investment costs will be generally lowered," Lee said.

However, a commodity exchange also poses risks, analysts said.

Son noted that it may attract more speculative foreign capital into the local market.

Another concern is that the envisioned exchange can become like Japan`s Tokyo Commodity Exchange, or TOCOM, which is mostly tapped by small individual investors rather than companies, he said.

"The major players in TOCOM are individual investors who target a large arbitrage, while those of commodity exchanges in the United States and Europe are companies who use the exchange as a hedge for their business," Son said.

Korea will face several challenges even if Seoul decides to establish a commodity exchange, both Lee and Son said.

Standardizing items such as the originality and ingredients of a product, a prerequisite for the establishment of the commodity exchange, will not be easy, they said.

Encouraging gold traders who are used to trading gold in traditional markets to move to the commodity exchange will be also a challenge, Lee said.

(yoonmi@heraldm.com)



By Kim Yoon-mi