Singapore vies to become commodities hub
When Sir Stamford Raffles founded Singapore in 1819, a flourishing trade hub quickly followed in commodities such as rubber, tin, gold and opium from India.
The southeast Asian city-state later fell under the shadow of fast-growing Hong Kong as a financial centre. But the rapid growth of Asia’s economies, coupled with the generous tax breaks it offers, means Singapore is challenging its regional rival for supremacy.
Already an important trading centre for oil, Singapore wants to position itself as Asia’s leading commodities hub — before Shanghai and Hong Kong get there first.
“They’ve had a vision for making Singapore a commodities hub for some time and it’s recently really started to pay off,” says Jennifer Ilkiw, Singapore-based head of Asia-Pacific at IntercontinentalExchange, a US commodity exchange.
Sunny Verghese, chief executive of Olam, the Singapore-listed agricultural trading house that relocated from London to the city several years ago, sees a “five to seven years” window before China-based rivals start to catch up with Singapore.
Lured by the shift of global commodities demand from Asia, traders are resettling in Singapore’s central business district. But, in large part, traders say the city is also benefiting from tax and regulatory arbitrage. It is a powerful draw for companies looking for “light touch” oversight.
The number of traders employed in the physical commodities sector increased last year by 17 per cent to 12,000, according to the government.
Three large agricultural houses — Olam, Noble Group and Wilmar — are already listed in Singapore. Other commodities houses and natural resources companies are either moving their incorporation into the city, such as Trafigura, or locating regional hubs there — Xstrata, BHP Billiton or Anglo American. Moreover, the commodities traders that arrived more than a decade ago, including Glencore and Vitol, are trying to book as much business as they can through the city.
The growth of the sector has created a cluster that is attracting even more business. Ms Ilkiw says it pays for traders to be near each other, even their rivals.
“We are seeing the Japanese move their trading desks to Singapore. Partly it is the need to be close to other traders, so they are coming here rather than anywhere,” she says, adding that the networking is crucial. “If I have a party in Hong Kong, 10 people will come. If I have one in Singapore, 250 will come.”
Industry executives estimate Singapore handles about 15 per cent of the world’s physical crude oil trading, ranking fourth after Geneva, London and a combined New York and Houston. In agriculture, it sees about 20 per cent of global trade, ranking second after Geneva.
In metals and minerals, Singapore is battling London for the number two slot, with the Swiss hubs of Geneva, Zug, Lucerne and Lugano at the top.
A scheme called the “global traders programme”, or GTP, in place since June 2001, offers a corporate tax rate of 10 per cent to traders. Companies can qualify for a 5 per cent rate if they commit to meeting certain staff hiring levels, make significant use of Singapore’s banking and financial services, and other criteria.
“The programme encourages global trading companies to use Singapore as their regional or global base,” International Enterprise Singapore, the government agency promoting the city, says in a brochure.
Yet industry executives say the draw of the city is not just the tax breaks. If taxation was the only reason, Dubai, which offers traders a zero tax rate, should be ahead. Executives say they are lured by an English legal system, an abundance of financial and other services, and lower costs than in Switzerland, which is suffering from the strong appreciation of the Swiss franc.
This combination is what Kathy Lai, assistant chief executive of IE Singapore, calls “a strong ecosystem of trade services” such as finance, insurance, arbitration, logistics, freight and manpower.
Commodities traders are also attracted by what Singapore officials openly describe as a “lighter touch” regulatory regime.
Yet traders warn that the city will have to balance its laisser faire approach with a need to show it is aligned with western markets in adhering to tough G20 rules enacted in the wake of the 2008 financial crisis.
The US and Europe are adjusting to those rules, such as the Dodd-Frank act in the US, which clamps down on opaque “over-the-counter derivatives” trading, in part by requiring the use of clearing houses to help safeguard trades.
“If Singapore doesn’t follow the [global] regulations in certain dimensions they run the risk of being branded the ‘wild east’,” says a senior trader. “I think they will maintain a stance of being trader-friendly, but they will fall in line with internationally accepted standards of regulations.” -By Jeremy Grant