Some 30 exchanges offer commodity futures and options. Trading has expanded in recent years, reflecting the volatility in physical commodity prices, although the expansion of financial derivatives has been even faster. China is an increasingly important market for both the physical commodities and the derivatives.

Commodity futures and options are the oldest derivatives products. Producers and consumers need to hedge against fluctuations in the harvest, and even in early times farmers and merchants made informal agreements among themselves for delivery at pre-arranged prices. The first formal futures markets were the rice exchanges in eighteenth century Japan. Today, commodities are vital to the world economy, and the use of commodity futures continues to grow. However, since the introduction of financial futures in the 1970s, their relative contribution to exchange trading has diminished in importance.

The discussion below is based on the statistics compiled by the US-based Futures Industry Association (FIA).

The FIA's statistics reflect the fact that the global exchange-based derivatives market is now dominated by financials, particularly equity-related products (see Table 1). Traditional commodity futures and options, including precious and non-precious metals, agricultural and energy products, together had a market share in 2003 of only 7.8 per cent, down from 15.8 per cent in 1999².

Table 1: Turnover of exchange-traded derivatives in 1999 and 2003

The relative decline in commodities was due not to a shrinking commodity market but merely to a slower growth rate than their financial rivals. As shown in Table 2 and Chart 1, equity-related futures and options expanded substantially during the five-year period. In particular, equity indices futures and options experienced a five-fold increase. The increase of trading volume for commodity futures and options during the period was much smaller.

Table 2: Global trading of exchange-traded derivatives

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Source: Futures Industry Association, US

The FIA recorded trading data from 62 derivatives exchanges in 2003. Among them, only 30 exchanges traded commodities. Thirteen of these are located in the Asia and Oceanic regions, seven in US and most of the rest in Europe.

The US exchanges are still a major force in the global commodity futures and options market. As a whole, they accounted for 38.7 per cent of global turnover of all exchange-traded commodity derivatives in 2003. They had an even more substantial share in individual commodity products, especially in energy (51.7 per cent) and agricultural products (46.1 per cent) (see Table 3).

Table 3: Global turnover of exchange-traded commodity derivatives - US and non-US exchanges (2003)

As shown in Table 4, the New York Mercantile Exchange had the largest commodity derivatives turnover in 2003; i.e. 137 million contracts or 22 per cent of global turnover of exchange-traded commodity derivatives in that year. It was followed by the Tokyo Commodities Exchange (87 million contracts) and the Dalian Commodities Exchange (74 million contracts).

The FIA statistics also reflected the emergence of China as a major player in the global commodity futures market. Only two of the three commodity exchanges in Mainland China³, namely the Dalian Commodities Exchange and the Shanghai Futures Exchange, were recorded in the FIA statistics. Both exchanges showed impressive growth in 2003. The former recorded a 54.9 per cent rise in its turnover volume while the latter's turnover volume more than doubled (229 per cent). The Dalian Commodities Exchange even overtook the Chicago Board of Trade to become the third largest commodity exchange in the global ranking and the exchange trading the largest number of agricultural contracts (see Table 4) - albeit that Dalian's contracts are much smaller, e.g. its soybean contract is 7 per cent the size of the CBOT's. The increase in China's futures trading no doubt reflects the country's surging consumption of physical commodities to support its rapid economic growth.

It is interesting to note that few commodity exchanges are diversified. The majority of these exchanges (23 of 30) focus on only one commodity type - energy, agricultural, precious metals or non-precious metals.

There is no single exchange dominating commodities trading overall. The leading exchanges in individual commodity products are all different (see Table 5), probably indicating a higher degree of specialisation among commodity exchanges. Moreover, except for agricultural products, there is a high concentration of global turnover in the leading exchange.

Table 4: Turnover of commodity derivatives traded at exchanges, 2002-2003 (number of contracts)

Table 5: Concentration in commodity derivatives trading (2003)

In terms of commodity products, agricultural products (38 per cent) and energy products (34 per cent) took the lead in the global exchanges' total turnover in 2003. They were followed by non-precious metals (18 per cent) and precious metals (10 per cent) (see Chart 2 and 3).

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Source: Futures Industry Association, US

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Source: Futures Industry Association, US

¹This article first appeared in the July 2004 issue of Exchange.

²Derivatives exchange turnover is customarily measured in number of contracts traded. However, it should be noted that the notional values of different contracts may vary greatly.

³The Zhengzhou Commodities Exchange, which trades green bean and wheat, is not covered by FIA statistics.