12 July 2004	Monday	23 Jamadi-ul-Awwal 1425

The National Commodity Exchange (NCE), Pakistan's maiden online commodity futures market, is set to start functioning by the end of this month after successfully completing trial runs.

Analysts predict it will evoke a mixed response from the trading community.

Capable of handling financial derivatives, the NCE's trading regulations and system are based on trading norms existing all over the world since the launch of the futures trading on the Chicago Board of Trade, some 150 years back.

Although, the NCE's debut was delayed despite several earlier announcements by the management owing to operational sophistication attached to its launch. The current deadline appears to be final, some members believe.

Initial trading will be in gold and cotton yarn, a judicious combination representing both import and export sectors. Gradually, all major export and import commodities will be added to its list, according to the sponsors.

The Karachi Cotton Association (KCA) had been handling hedge trading in cotton since 1932 which was banned in early 70s for being un Islamic. Much water has flown under the bridge since then, but the KCA high ups failed in getting the ban lifted despite their best efforts and several official undertakings about lifting the ban.

On the other hand, the Karachi Stock Exchange (KSE) is allowed forward trading in over a dozen shares. Permission to the NCE raises questions as to why the KCA has been denied the same facility or did it fail to plead the case well, market sources said.

"I intend to make the NCE like the Chicago Board of Trade", a federal minister reported to have vowed at the time of its launching, adding that only time would tell how it works as a chief exponent of hedge trading".

Hedging facility ensures market risk in case the prices show abnormal increase or decline owing to speculative activity by big operators. This is claimed to be the sole purpose behind hedging facility by its exponents.

"Growers and manufacturers world over face wide fluctuations for crop and raw material prices which they produce and use in that order", the NCE highups said adding, "the hedging facility will provide the needed risk cover to both". But in hedge market parlance, it is pretty difficult to chain speculative forces which could push prices higher or lower whenever their "vested interests" are at stake, said a leading dealer who had a vast experience in hedge trading.

"It reminds me either-way speculative price squeeze on cotton in late 60s when the Karachi Cotton Association was allowed forward trading to ensure competitive prices for growers and spinners, leaving behind a long list of defaulters who failed in honouring their contractual obligations", he added.

Nobody could deny the fact that foreign commodity traders, having enormous dollar funds at their disposal, could corner the entire local crop or production outlets of the commodities intent for hedge trading. How to ease their speculative squeeze must have been thought by the NCE sponsors.

The New York cotton futures, for instance, have been ruling around 70 cent per lb for last several years but now they are being quoted at 15-year low, below 50 cents per lb which reflects negative aspects in hedge trading.

Cheap bank credits have already caused price flare-ups in the last two years, notably in wheat and guar. Both previously, were quoted below Rs10 per kg but now are being sold at double the price, as bulk of the production is stored in godowns.

The NCE high-ups must be keeping an eye on the prices of primary commodities as these could have chain impact on others. Pakistan produces about three million tonnes of cotton yarn each year, half of which is for the ancillary industry and the remaining for export, which now will be available for online futures trading.

Annual gold import figures fluctuate between 100 and 120 tonnes depending on the local demand and competitive prices in line with the neighbouring markets. Quantity of both commodities, which will be available for online trading is sufficient for initial launching, but its size and quantum could increase in due course depending on its operational success, the NCE sources said.

Having in its fold by now about 70 or odd members, a massive drive continues to net more prospective speculative investors in its fold. According to market sources the value of it's membership card has already soared to Rs7.5 million from the original fee of Rs3 million.

Increase in the value of card reflects that more moneyed people will join it after the NCE makes a debut by the end of this month. The NCE, initially will operate from a business centre on Shahrah-e-Faisal but will move out as soon as the renovation in its permanent abode was completed.

"A big question being debated in business circles is whether the NCE will affect daily trading on the Karachi bourse or other major commodity markets" as some brokers say "all will depend on the performance of the NCE".