Singapore thrives as a major trading post

SINGAPORE has been a major trading nation despite having no significant natural resources of its own. From its early days as an outpost of the Sumatran Srivijaya Empire ("Temasek" or "seatown") to becoming a major port of call between Europe and East Asia for ships plying their trade in the 1800s, its excellent harbour, the free trade status conferred on it by its founder, Stamford Raffles, and the development of rubber planting had set the course for Singapore to become a major export-import centre.

Fast forward 200 years, Singapore is now arguably one of the world's busiest ports. A World Trade Organization report showed total merchandise export and import by Asia stood at US$5.53 trillion and US$5.56 trillion respectively in 2011, comprising 30 per cent of the world's export-import volume. The same report ranked Singapore as the ninth largest exporter and importer in the world.

The trading business traditionally involves a relatively straightforward process of buying a product and selling it at a higher price for a profit. Today, trading has become more sophisticated with technological advancement, the outsourcing phenomena, complex supply chains around the globe, and one characteristic aspect of trading today - the ability to extract value from various parts of the supply chain.

For example, as more and more businesses centralise their trading or commercial activities, the flexibility to mix and match various sources of supply with customer orders from around the globe for the highest profit margin or to ensure supply stability has become important.

Added to the complexity are the various trading strategies adopted - arbitraging between different grades of particular products, asset optimisation, derivatives trading and hedging and structured financing transactions. Freight is often treated as a separate commodity where ships can be rerouted to different locations to optimise costs and returns.

Hence, while location has always been an important competitive advantage for the business, the ability to extract value from various parts of the supply chain has made this success factor even more critical.

Singapore has continued to evolve as a popular choice for companies as they seek the advantage of a centralised trading hub experience, including a whole array of infrastructure and incentives: political stability, robust legal system, easy access to financial markets, attractive tax incentives, available talent and high-quality business infrastructure, as well as proximity to key Asian markets such as China, Japan, Korea and Australia.

For years, Singapore has been a major location for oil trading. Now, this has extended to other commodities such as metals, minerals and agricultural products. But over the one year, Singapore made headlines in the industry with news of commodity trading houses such as Trafigura and mining giants such as Anglo American and BHP Billiton either relocating or establishing their sales and marketing hubs in Singapore. It is attracting not just major trading and commodity players from Geneva, the Hague and London, but also global consumer goods companies that procure significant amount of commodities.

However, Singapore needs to continue to evolve to stay in pole position as competition is intensifying from Hong Kong, Shanghai and emerging locations such as Malaysia, Dubai and Brazil.

Here are some opportunities and challenges for Singapore to help it to retain its position in trading, taking commodities trading as an example:

Provide incentives for companies to build capabilities to enhance value in the supply chain: While there are many different business models, many commodities trading companies are horizontally expanding and vertically integrating to entrench themselves within the supply chain. Even producers - mining and plantation companies - are setting up their own trading arms. For these companies, centralisation is important for more dynamic supply chain management, as are the ability to achieve synergies across business units and extract efficiencies across each activity, for example the ability to manage or hedge the cost of procurement on top of the usual approaches to reduce cost, utilise asset optimisation or charter efficiencies. While integrating along the physical commodity value chain can be financially rewarding, it brings with it unique and often little-understood complexities.

Greater volatility and the trend towards 'Enterprise' risk management approach: Activities of commodity companies straddle both physical trades and paper (derivatives). With volatility becoming the new normal in the world of commodity price and foreign exchange, more companies are seeking to manage risks actively. More companies are establishing commodity trading and risk management functions to take pro-active risk management stance to optimise rather than simply "hedge" underlying exposures. Companies typically start their risk management journey with a "Federated" risk management structure (where commodity risks are managed locally by different businesses), then progress to an "Enterprise" risk management approach (which covers the entire supply chain spectrum to enable cost savings, synergies and certain optimisation).

Challenges in moving to an "Enterprise" risk approach include agreeing on a common risk management strategy, an appropriate governance and control framework, a clear performance management framework including transfer pricing mechanism, and a robust information, data and systems architecture, all of which arise because there is typically a lot of autonomy across different functions and product types within the supply chain.

Derivative trading regulation: Derivatives trading is often an intrinsic component of a commodity trading company - whether as a risk management or a proprietary trading tool. However, post-global financial crisis the Group of 20 pledged to improve market transparency and avoid risk concentration by introducing central clearing and reporting of the much-criticised "opaque" over-the-counter derivatives. New regulations such as the Dodd-Frank Act in the United States and, European Market Infrastructure Regulation in the European Union and, closer to home, the proposed amendments to the Securities and Futures Act by the Monetary Authority of Singapore would have wide-ranging impact to commodity traders, especially the smaller players.

The impact includes the readiness of in-house infrastructure, increased cost of trading and hedging, to squeeze cash and liquidity position. While Singapore strives to harmonise with international regulations, market participants hope that the local regulators will provide options and clarity on certain rules such as licensing and exemptions, which will continue to promote liquidity and the attractiveness of Singapore as a commodities trading hub.

More sophisticated financial offerings: Access to financing is of utmost importance to trading companies. A supertanker oil shipment, for instance, could require financing of up to hundreds of millions of dollars. With European financiers reining in some of their lending due to the eurozone crisis, Singapore with its strength as a financing hub can fill the gap through improving capital markets liquidity, a more diversified investor base and well-developed banking system.

Singapore is also the fastest-growing bond market in Asia where the financial systems are still very dependent on banks. Singapore needs to continue to broaden and deepen its financial offerings as commodities trading players continue to desire more sophisticated tools such as niche insurance underwriters, funding from alternatives sources such as commodity funds, private equity, trust structures, joint funding between commodity players and the financial sector and structured trade financing.

Further flexibility around withholding tax on interest expense under the Global Trader Programme would also help the larger players sourcing billions of financing globally.

Productivity and sustainability of the talent pool: No business can thrive without talent. The points raised above show that for every trade executed by the trader, there needs to be an army of support staff to complete the transaction - production, logistics, marketing, settlement, ocean-freight management, risk management, treasury, governance, legal, underwriting, accounting and finance, just to name a few. This resource pool needs to comprise of highly skilled and talented people to optimise every activity in the supply chain to produce value and superior return.

While Singapore has a ready talent pool for some of the skill sets, for example ocean-freight management (Singapore being one of the world's busiest ports), financial sector talent which can interchangeably work on foreign exchange risk management and treasury, it still needs to continue to grow the talent pool in others areas within the supply chain such as asset optimisation, trading, commodity risk management and operations.

Trading, in particular commodities trading, has grown to become more complex for many global companies. For Singapore to thrive as a leading trading hub, it should continue to take a proactive stance to ensure that a conducive eco-system exists to support businesses and trade flows. Above all, it needs to continue to attract the best talent who understand business complexities in a changing landscape to compete with other emerging hubs.

Source: Singapore Ministry of Foreign Affairs

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Singapore thrives as a major trading post

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