Why Vietnamese Enterprises Are Still Not Keen on Commodity Exchanges

DNHN - The value of commodity transactions via exchanges accounts for 24% of the total trading volume of products worldwide, with Asia accounting for 56%. The indices of some famous commodity exchanges have become the guiding principle for the world market.

The above information was provided by Mr Pham Hai Tung - Vice Chairman of the Vietnam Association of Small and Medium Enterprises at the seminar “Trading via Commodity Exchanges - A Sustainable Business Solution, Multiplying Profits” organised by Enterprise and Integration Magazine - the mouthpiece of the Vietnam Association of Small and Medium Enterprises in Ho Chi Minh City.

Accordingly, Mr Tung said that in Vietnam, the Mercantile Exchange of Vietnam (MXV) was established by the Ministry of Industry and Trade in 2010. With Decree No. 51/2018/ND-CP amending and supplementing some articles of Decree No. 158/2006/ND-CP dated December 28, 2006, detailing the Commercial Law on trading goods through commodity exchanges of the Prime Minister, the legal framework for trading activities in this form has become truly transparent like international exchanges. Therefore, trading activities through the Commodity Exchange in recent years have had many changes. Currently, the Mercantile Exchange of Vietnam has 26 items belonging to five groups of goods traded and connected to 8 major commodity exchanges in the world. As of the end of August 2023, there were more than 30,000 accounts registered and trading. According to statistics from the first 8 months of 2023, the average trading value per session reached VND 4,000 billion, and the peak session reached VND 9,500 billion.

“The above results are still quite modest compared to the potential of Vietnam. Trading goods through exchanges is a form of business that brings many advantages such as it enables businesses to trade quickly by electronic means, so they can trade with the whole world from just one place, minimising risks for both buyers and sellers due to the intermediary role of exchanges, businesses can also rest assured to produce and trade without worrying about price fluctuations in the market. In addition, businesses or investors can participate in trading and investing in derivative commodities,” said Mr Pham Hai Tung.

“We believe that this is an important solution to solve the long-standing situation of” bumper crops, low prices” in Vietnam’s agricultural sector. Moreover, this is also a form that is very suitable for the trend of expanding international trade and e-commerce of the Party and the State,” Mr Tung emphasised.

Commodity exchanges were born in the 18th century and have now become a popular trading channel worldwide. However, this form of trading has not developed commensurately in Vietnam. Regarding this issue, Dr Vo Tri Thanh - Director of the Institute for Strategy and Competitiveness Studies, also explained the reason why businesses do not understand it well. He said that many people misunderstand this concept, leading to the fact that Vietnam is not very interested in it while the world has applied it for a long time.

“Some people say that this exchange is similar to the Forex market or the stock market, so it can be said that this is a basic commodity exchange. If we talk about basic commodity trading like that, it is very old because, from the time humans produced agricultural products and had revenue, the nature of these cash flows is a financial investment and is backed by the production and circulation of basic commodities, it is no different from the market,” said Mr Thanh. “However, the exchange is more advanced for 2 reasons: it is a market with full competitive information, limiting asymmetric information between buyers and sellers, the role in the market with the highest efficiency… This is called a high-end market that forces businesses to learn to be able to stand firm in the new situation of continuous development as it is today.”

Sharing the same view, Dr Dinh The Hien - Director of the Institute for Informatics and Applied Economics said that ensuring safety and liquidity in the trading of large volumes of goods, price safety, and quality standards are extremely necessary for businesses. Although commodity exchanges have existed for a long time and have developed strongly in European countries, the US, in Vietnam, this form has not yet been clearly defined. Currently, there are more than 100 commodity exchanges in the world with large entities such as ICE, LIFE, Chicago… In the Asia region alone, commodity exchanges have only emerged since after 1990 and up to now, there have been 46 exchanges with main product lines such as agricultural products, energy, metals…

As a long-standing enterprise and also a native of the Central Highlands, Mr Luong Tuan Vu - CEO of Gia Cat Loi Commodity Trading Joint Stock Company - a member of the Mercantile Exchange of Vietnam, has witnessed many “rescue” operations for farmers. “Can our farmers develop like farmers in the world such as the US, UK, Japan… or not? Developed countries in the world, before they grow a product such as corn, potatoes, cassava or soybeans, coffee, or wheat… all determine which product is suitable for their land and how much profit it will bring on the exchange among the listed items…”, Mr Vu shared.

Also according to Mr Vu: In the Central Highlands, I have witnessed many households seeing high coffee prices and rushing to cut down pepper and cashew trees to grow coffee, then seeing high rubber prices and cutting down coffee, pepper, and other trees to grow rubber, and then going in circles. Even in the Central Highlands in the past few years, there has been a boom in growing passion fruit. At first, passion fruit was speculated up to VND 60,000/kg, now it has dropped to VND 45,000/kg, and no one wants to sell it anymore, but if passion fruit is not sold, it cannot be eaten after a few days, it will rot. Those are the inconveniences of the people as well as the businesses that buy and sell when our businesses act as traders for China…

Also at the seminar, businessman Tran Quoc Cuong - Director of Huy Thanh Dat Joint Stock Company operating in the steel sector also talked about his company after the COVID-19 pandemic began to be controlled, the economy began to recover, creating a new wave of commodity price increases, something that had never been seen before. Global metal demand has increased significantly since Q1/2021 when many countries have approved and accelerated the construction progress of infrastructure projects, thereby stimulating Vietnamese steel producers to boost exports, especially to the US market. Metal prices also started to increase sharply, so our business’s operations in 2021 also indirectly benefited.

“However, domestic steel market demand fell sharply in 2022 due to the strong impact of the real estate market freeze caused by tight real estate credit policies; the corporate bond market faced difficulties; high-interest rates… Slow consumption forced our business to adjust and reduce import output, continuously adjust selling prices down, and inventory was always high… Revenue began to decline sharply, and business operations faced many risks in terms of selling prices, even heavy losses,” shared Mr Cuong.

Therefore, Mr Cuong said that the solution to hedging steel price risks immediately addresses the issue of ensuring the value of inventory, fixing input costs, and fixing output profit margins. Price risk hedging activities are carried out through the Mercantile Exchange of Vietnam when providing businesses with the right to connect and trade with major metal commodity exchanges in the world such as LME, NYMEX… Through the Mercantile Exchange of Vietnam, his company can also easily update the fluctuations of world metal prices in real-time, so price forecasting work has also been significantly improved.

In addition, Mr Cuong also proposed that the Mercantile Exchange of Vietnam (MXV) should develop a more flexible transaction fee and margin policy. Reduce the ceiling of transaction fees and membership fees, creating conditions for trading members to reduce transaction costs for customers better. For individual customer accounts, the margin level can be applied as for institutional customers and equal to the margin level prescribed by international exchanges. Currently, MXV has only been able to perform the function of organising and operating, acting as an intermediary to connect with international exchanges, and is simply an intermediary brokerage organisation. MXV has not yet performed the larger functions and roles at present. It is proposed that in the coming time, MXV needs to enhance its role in the market organisation, study to put some Vietnamese products with strengths on the exchange and move towards supporting corporate customers in implementing actual goods handover, ensuring that it is linked to domestic commodity prices close to international commodity prices.

Ministries and sectors responsible for advising the Government on policies need to closely follow market practices. Developing new products needs to have a legal framework in advance to ensure that the market operates smoothly, in the right direction of the state, and protects the safety of customers and investors.

Commodity derivative products are high-level financial products, requiring participating investors to have specialised knowledge in finance, industry, economics, technical analysis, etc. However, at present, the training of knowledge on commodity derivatives is mostly carried out by commodity trading companies, and the training is not yet standardised, and the training knowledge has not been standardised. Therefore, the popularisation and dissemination of goods to the community has not been widespread and has not been well received by the majority of social strata. It is recommended that in the coming time, ministries, sectors, MXV, and commodity companies need to coordinate to develop a set of standard teaching materials on knowledge and at the same time open high-quality certified training centres to support knowledge for investors and ensure the popularisation of products to the public.

Some photos from the seminar:

Uyen Nhi