Iran Mercantile Exchange;
Efforts & Opportunities
By Mahdi Goodarzi & Mojde Rezaee
Considering the many investment opportunities in Iran, both in direct and portfolio investment, the lifting of sanctions has paved grounds for Iran’s using fresh money, by re-linking Iran’s economy to global financial markets. Under the current situation, the role of the capital market, including the Iran Mercantile Exchange (IME) is of paramount importance; therefore, market participants are in dire need of more familiarity with the IME.
Iran Mercantile Exchange was established on September 20, 2007 in accordance with the article 95 and note A of the Third and Fourth Development Plans, respectively being passed by the High Council of Exchanges following the merger of the Agriculture and Metal Exchanges of Tehran.
As the leading multi-commodity exchange and the only multi-faceted market in the region, IME enjoys Local and Export Trading Floors, where metals, minerals, oil and petrochemicals are exchanged. In fact, the export floor has been established in Kish Island to boost the export of crude oil and petrochemical products in a transparent and lawful market to Europe, Africa and the Middle East.
The IME has in place the
- Spot market,
- Derivatives market,
- Side market, as well as
- The Certificate of Depository Receipt market
and complies with rules and regulations of not only Iran’s capital market, but also those of global standards.
A variety of instruments are being offered in the IME, including:
- Cash trades,
- Forward Contracts,
- Standard Parallel Salam Contracts,
- Credit Trades,
- Certificate of Depository Receipts, and
- Future Contracts.
Since its establishment, officials have worked tirelessly to launch the financial market in the IME. The most successful part has been the Gold Coins Derivatives, which came sweet to investors’ taste, considering the safe guard nature of gold amid the nation. Since the trades boomed rapidly, it was decided for the IME’s financial market to be based on derivatives contracts on gold coins. Other assets like agricultural and some selective industrial products were tried as well, yet have not turned out to be very successful mostly due to a lack of demand over the trades.
What is the plan?
The IME is to follow the same procedure of other mercantile exchanges in the world. First, improving the spot market is intended, where the supply and demand leads to price discovery and delivery is done under the supervision of the Mercantile Exchange. Then, by clearing settlements on the basis of a Delivery Versus Payment (DVP) model, risk management services are offered.
After establishing a well-functioning spot market, the next level is to launch a financial market based on some financial instruments, like Forward Contract or Certificate of Depository Receipt, which are simple to navigate.
Furthermore, financing through the IME has been accelerated and is entering a new phase. The exchange is to launch a currency derivatives market as a means to hedge FX volatilities; it has also played an efficient part in convincing all influential institutions, including the Competition Committee as to the continuance of offering petrochemical products, that provide us with a competitive advantage in the region, on the IME, which is interpreted as a great step in boosting transparency in the economy.
IME is also to shift the spot deliveries to expansion of derivatives on physical market and therefore, issue securities on physical commodities, which will later be followed by entering into joint and dual transactions on some products; to be more specific, the IME is interested in initiating ties with international exchanges across the world enjoying the opportunity of cross listing and mutual trading on commodities.
IME Report Card
As statistics show, the conducted trades in the IME during the first 10 months of 2016/17 (March 2016- January 2017) has registered 142% and 87% rise in terms of the trading volume and value, respectively.
Industrial and mineral trading floors were host to products, including iron ore, aluminum, steel, zinc, gold, cement, etc. while oil and petrochemical floors witnessed trades of tar, chemicals, argon gas, sulfur and vacuum bottom. In addition, goods such as barley, maize, sugar, saffron, wheat and oil seeds were traded on the agriculture floor.
IME’s side market also observed trading 92,606 tons of goods in agriculture, chemicals, industrial and mineral spaces worth more than IRR 1,229 bn.
It was so while 2,545,000 futures contracts of gold coins, worth more than IRR 300,000 bn were signed in the derivatives market of the IME, posting a 144% and 202% increase in terms of number and value of trades, respectively; 25,445 trades worth more than IRR 295 bn were also took place using options.
Over this 10-month period, the IME financial market value surpassed IRR 47,000 bn, which demonstrates a significant 1,238% growth. In addition to different kinds of Standard Parallel Salam contracts, the commodity certificate of depository receipts for gold coin, barley and maize were also traded. In this market, 6.3 mn tons of goods were traded via Standard Parallel Salam contracts and 381,000 tons of goods were traded through commodity certificate of depository receipts out of which 9,561 belonged to gold coins trades.
The total volume of commodities traded in the IME physical market also passed 21 mn tons worth more than IRR 302,000 bn; the volume and value of such trades shows a 17% and 24% surge compared to the previous year as well.
Industrial and Mineral Floors
During this period, 8 mn tons of goods worth IRR 128,000 bn were traded on the industrial and mineral floors of the IME, posting a 5% and 25.5% increase in terms of the volume and value of trades.
5.8 mn tons of goods were traded using Salam (forward) contracts worth IRR 95,000 bn; about 2.2 mn tons of goods worth 32,000 bn were also traded in cash while credit trades accounted for 4,130 tons of goods worth IRR 317 bn.
In the Metal products group, approximately 6 mn tons of goods worth IRR 96,000 bn were exchanged, registering 16.5% and 33% growth in terms of volume and value of trades. Furthermore, 92,000 tons of aluminum, 222,000 tons of copper products, 1.9 mn tons of iron ore as well as 4,500 tons of cement were traded. 597 kg of gold bullion were also sold on this floor, posting 28% and 50% rise in terms of volume and value, compared with the same period last year.
Over March 2016- January 2017, the IME has hosted more than 2 mn tons of agricultural products, experiencing 194% and 167% rise compared to the year before. 1.8 mn tons of goods, worth IRR 17,000 bn were sold in cash; 281,000 tons of goods with IRR 7,000 bn in value were exchanged via Salam contracts and 7,260 tons of goods worth IRR 105 bn were also traded on credit.
More than 1 mn tons of barley were traded worth IRR 8,000 bn; additionally, 245,000 tons of maize, 8 kg of saffron and 388,000 tons of sugar worth more than IRR 9,000 bn were among goods traded on this floor.
Oil and Petrochemical Products Floors
Over this period, 11 mn tons of goods worth IRR 147,000 were exchanged, which posts a 31% and 7.91% increase in petrochemical and oil products, respectively. Of the petrochemicals, polymer products accounted for the highest volume traded with 2 mn tons of goods worth IRR 79,000 bn, showing a 31% and 33% growth in terms of the volume and value of trades, accordingly. Regarding chemicals, 800,000 tons worth IRR 14,000 were traded, proving a 25% and 36% increase in terms of the volume and value.
On the oil products floor, 4 mn tons of tar with IRR 30,000 value were sold, showing a 60% rise in volume.
It is worth mentioning that nearly 5 mn tons of goods worth $757 mn were traded in the export ring of the IME, i.e. 1.8 mn tons of iron ore worth $58 mn, 2 mn tons of tar worth $ 659 mn, and 178,000 tons of sulfur worth $10 mn contributing to the most.
Taking into consideration its role in Iran’s economy improvement, the IME is intended to define precise plans and strategies to take the most out of the available opportunities in the post-sanctions era and becomes one of the major channels directing capitals, domestic and foreign, into the country and also turn into the price reference for basic commodities and intermediate raw materials in the region.
In line with moving towards securitization of commodity transactions and introducing different instruments of risk management and financing, actually applying the certificate of depository receipt as well as its improvement is seriously followed by the IME officials to which, launching commodity funds in the near future can also be added. Furthermore, providing grounds for running foreign exchange funds along with derivatives contracts are being planned which will then, be continued by launching the same derivatives contracts backed by new assets, namely Forex futures contracts, which altogether are aimed at hedging investors’ risks and deepening the market.
Improving the IME export floor, its interactions with global commodity exchanges, taking steps towards international standards, launching the trading of non-transferrable properties in the Side market along with providing the electronic infrastructures for easy access to this exchange are among the other development plans.
All in all, investigating the IME performance during the recent years signals an ascending trend in its activities, both internally and internationally. From a domestic point of view, the IME is to attract more attention of market practitioners and offer services to in-house industries. At an international level, signing MoUs with global mercantile exchanges, joining World Federation of Exchanges, establishing the warehousing system in free zones, negotiating to launch warehouses (licensed by the IME) at foreign countries’ ports to facilitate export and import as well as entering in talks with foreign banks to settle and trade in foreign currencies are to promise a brighter future for the IME, pushing it towards fully using its potentials to bring prosperity back to Iran’s economy.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
To contact reporters: Inter@agah.com