Trading companies continue to flock to Singapore – a crucial trade hub in the Asia Pacific region, writes Richard Hartung.
While Sir Stamford Raffles, the founder of modern Singapore who first set foot in the country nearly two centuries ago, could hardly have imagined how the country looks today, part of the scene has remained much the same. Just as Raffles could watch ships plying their trade in the harbour then, so too can traders do the same thing today.
“My traders have a new hobby of spotting their tankers and bulk carriers, checking how loaded they are,” as they look down on them from a skyscraper near the harbour, Trafigura Group oil director Jonathan Pegler told Bloomberg shortly after the company moved its marketing and trading hub from The Hague to Singapore.
The difference, of course, is in the scope, scale and complexity of the trading. Today, a ship arrives or leaves from Singapore every two to three minutes, with the 140,000 ships that stop in the country every year carrying everything from cocoa to electronics and making Singapore the busiest port by tonnage in the world. Along with trading in physical commodities, exchanges handle trading of commodities futures, ranging from coffee and crude oil to electricity and rare metals. And all this happens in a leading global city with highly-developed infrastructure, a strong legal structure, innovative financing and low taxes.
A strategic location
The natural advantages of Singapore that Stamford Raffles saw when he arrived in 1819 is in many ways the same, though in an entirely different environment.
Back then, Raffles saw Singapore as a strategic location with “an excellent harbour, and everything that can be desired for a British port. We have commanded an intercourse with all the ships passing through the Straits of Singapore. We are within a week’s sail of China, close to Siam, and in the very seat of the Malayan empire”.
While trade has steadily grown, only after Singapore became independent in 1965 did the innovative developments that laid the groundwork for the global hub it has become today actually happen.
In the 1960s, the government began a concerted effort to attract foreign investment so that it could become more export-oriented, while building up the legal framework and support services that underpin trading today. Shell built Singapore’s first oil refinery in 1961 and, with other oil majors following suit and expanding over the ensuing decades, Singapore has turned into the third largest oil refining centre in the world. Electronics followed, with Singapore growing from having the only TV assembly plant in Southeast Asia in the 1960s to becoming a vital node in the global electronics market.
In the ensuing decades, a multitude of new industries have sprung up. Along with continuing to play a vital role in traditional sectors such as electronics and natural resource commodities, companies in leading-edge sectors such as outer space technology have set up their businesses in Singapore as well. The result is a commodity trading community that generates international wholesale turnover exceeding US$1.3tn annually, which has contributed at least 5% to Singapore’s GDP annually over the past five years.
At the heart of this development is a host of infrastructure and services that has enticed leading trading companies to set up an office or, increasingly, to shift their regional or global headquarters to Singapore. While Singapore has the communications and transportation infrastructure that makes it easy to do business, far more contributes to making it an attractive location. As Advanced Material Trading (AMT) senior director Motoki Nishino says: “All of the world has telecommunications and internet.” What makes the difference, Nishino and others explain, is the infrastructure, financial services, people, legal structure and low taxes.
Today, Singapore continues to be ranked as the second most competitive country globally in the latest World Economic Forum (WEF) Global Competitiveness Report, right after Switzerland, due to outstanding performance across all dimensions of the competitiveness index. The city-state boasts one of the best institutional frameworks and possesses world-class infrastructure, the WEF reports, along with ranking second for intellectual property protection and third for the efficiency of the legal framework.
Those advantages have attracted companies such as Barry Callebaut, which operates its regional headquarters for both the cocoa and chocolate business in Singapore and handles shared services such as human resources, legal and marketing. As Edmund EE Kim Seng, president of cocoa, Asia Pacific, explains: “Singapore is the ideal location for the company to integrate its Asia Pacific chocolate and cocoa businesses and expand its footprint in the region,” because it places the company in close proximity with the regional and global headquarters of key customers, enables access to diverse sources of low-cost financing, has proximity to world-class shipping and logistics providers, and offers a talented workforce.
Over the past decade, Singapore has seen a rapid influx of trading companies. Noble Group, Olam International and Wilmar International are among the large firms that have built up their operations in Singapore, hiring hundreds of traders, while global giants such as Glencore and Vitol have also expanded significantly. Other companies have also shifted more of their operations to Singapore, with US giant Cargill and Swiss trading group Mercuria expanding their teams, and with Trafigura moving its headquarters from Switzerland to Singapore in 2012. BHP Billiton also moved its marketing and trading hub from The Hague to Singapore, and Anglo American and Rio Tinto have grown their businesses as well.
As senior minister of state for trade and industry, Lee Yi Shyan, recently noted, trading companies in new sectors are also setting up operations in Singapore. Metalor opened its gold refinery in June 2014, for example, while De Beers has relocated its purchasing and auction sales to Singapore, and Japanese firm AMT recently became the first rare earth and metals trading house in Singapore. 25 companies now have an LNG trading or marketing presence, he says, compared to none a few years ago.
From its earliest days Singapore has built up port, warehouse and processing facilities to handle a multitude of commodities, and the infrastructure today can support an even more diverse range of products and commodities.
Even though Singapore can currently store about 11 million m3 of oil and related products such as gasoline or chemicals, equivalent to about 68 million barrels of oil, it needs even more space. It is building an underground storage facility that will increase its capacity by more than 50% and is supporting development of facilities in neighbouring Malaysia and Indonesia.
Along with facilities for oil, Singapore has set up other facilities such as warehouses in a free trade zone, specialised warehouses, and secure facilities for high-value commodities.
Along with trading in physical commodities, Singapore exchanges for trading of futures and other contracts have grown significantly.
Before the 1980s, the market for futures contracts was small. Practices began to change when the Singapore International Monetary Exchange was founded in 1984, though even by the early 2000s there were only a few thousand contracts per year in fuel commodities or rubber futures.
The situation changed significantly when the Singapore Mercantile Exchange (SMX) was launched in 2010 as a pan-Asia multi-product currency and commodity derivatives trading hub,with contracts on oil as well as currency and gold futures. In late 2013, US-based Intercontinental Exchange Group (ICE) bought the SMX as part of its strategy to expand its footprint in Asia. David Goone, chief strategy officer at ICE, said at the time that “Asia-based trading activity in energy and interest rate products has been rising as the region increases in importance in global markets”.
Memorandums of understanding that SMX signed with exchanges in Thailand, Indonesia and other markets have also enabled it to expand into futures trading in rubber, pepper and other commodities.
As trading has developed in Singapore, so too has the financial services infrastructure that supports it. More than 170 global, regional and local financial institutions as well as more than 200 insurance companies provide trade finance, structured financing facilities, risk management, corporate finance, business insurance and other services.
ING Bank Singapore, for example, says it finances physical flows of commodities such as crude oil and petroleum products as well as agri-commodities, with its team serving clients based in South Asia and leveraging the firm’s international network to support its clients. While ING country manager Catherine Low says the usual draws of proximity and connectivity to markets as well as the strong rule of law and stable environment make Singapore attractive, other factors include its positions as Asia’s leading oil trading hub and as the world’s largest bunkering port.
When a Singapore company took an equity stake in a Russian joint venture company that required local financing support for a greenfield project in Ukraine amidst ongoing Russia-Crimea tensions and uncertainties over possible US sanctions, for example, ING was able to combine sector expertise and local knowledge in Singapore with support from Moscow to structure a term loan for the company.
RBS Asia head of structured trade finance Sander Hansen says his institution, too, provides a variety of types of commodity finance. He is seeing a lot of demand for prepayment financing solutions, for example, that enable off-takers to prepay their suppliers for future deliveries of commodities under long-term contracts, allowing them to lock in supplies at favourable terms, and for the suppliers to obtain long-term funding at the same time. RBS sees its customers having or opening trading offices in Singapore, Hansen says, and Singapore’s stable banking regulations help the bank to create long-term relationships.
The capabilities of ING, RBS and the many other financial institutions for financing for a vast range of trading companies make Singapore an easier place to do business for many of the firms in the country.
While the trading community has been growing for decades, the shift of corporate headquarters to Singapore over the past five years has swelled the number of commodity traders well above 14,000, and Singapore now has the fourth largest trading community in the world after London, New York and Houston.
With just about 60% of those staff being Singaporean, firms still need to recruit thousands of foreigners. Making it easier to attract talent is Singapore’s ranking as the most liveable city in Asia and as the seventh most liveable city globally, according to PwC. Singapore was the only city in Asia to break into the top 10 in health, safety and security, and it ranked first overall in ease of doing business, transportation and infrastructure. The only downside was cost, where Singapore was also ranked by the Economist Intelligence Unit as the most expensive city to live in anywhere in the world.
To help with talent development locally, leading industry players in the trading sector teamed up with Singapore Management University (SMU) and International Enterprise (IE) Singapore to set up an International Trading Institute at SMU in 2007. Seeing a need for still more expertise, other universities such as the Singapore University of Technology and Design are also setting up similar programmes.
Companies are also doing more on their own to grow the talent pool and, for example, BHP Billiton manages strategic HR functions such as global talent attraction, development and strategic deployment in Singapore.
One aspect of Singapore that perhaps surprises people the most is the high level of government support for trading companies. Low taxes are perhaps the most visible aspect, as trading companies can receive economic incentives for substantial economic activities held in the country. This encourages the growth of high value-added capabilities and creates employment opportunities.
At the heart of commodities trading regulation is the Commodity Futures Act (CFA), which was enacted in 1992 to regulate trading in commodity futures contracts, license commodity futures brokers and ensure adequate protection to investors. The CFA, renamed the Commodity Trading Act in 2001, was expanded to cover all commodities and all forms of commodities trading activities, including forward contracts, leveraged trading, and spot commodity trading.
Another programme is the Trade Facilitation Scheme (TFS), which addresses market gaps in trade financing for Singapore companies in emerging markets by sharing the risk on credit guarantees provided against non-payment risks of overseas issuing banks. As part of its efforts to promote usage of trade credit insurance, IE Singapore subsidises 50% of insurance premiums, subject to a maximum of S$100,000, for qualifying companies.
Along with the robust and efficient legal framework giving companies operating in Singapore confidence in the legal system, as noted by the WEF, there is strong protection for intellectual property and institutions, such as the Singapore International Arbitration Centre, are firmly established.
The AMT story
One example of a trading company that recently set up in Singapore is AMT, a Japanese-headquartered firm specialising in rare metals, which established a subsidiary to secure rare metal resources and develop inroads into Southeast Asia.
Along with being a place to source new customers outside of Japan, says senior director Nishino, Singapore also provides an alternative channel for supplies in the event of market disruptions and is close to users in the auto industry.
Nishino says he found that IE Singapore was very interested in the rare metals industry when he met with them to discuss setting up the subsidiary, and he says: “We easily established a company, registered and could find good traders and accounting or finance staff.” Nishino says one difference between Japan and Singapore is that staff in Japan stay in the same company much longer. He is adapting, though, and said: “We should accept the differences of each country. We can easily find good people.”
Another benefit of being in Singapore, he has found, is that its location as a geographical centre means he has easy access to Vietnam, India, Indonesia and other countries. Moreover, regulations are minimal and the rules have actually helped in trading.
AMT currently focuses on two areas in Singapore: its traditional rare metals trading business for Japanese rare metal consumers and new business development for new customers outside of Japan.
While it can be difficult to find new customers, Nishino says, AMT is planning long term for the effects of deindustrialisation of the primary material industry in Japan. Even though the main parts of the primary material industry will maintain production in Japan, Nishino says: “Our current customers will move to Asean: we should be here waiting for them.”
What comes next?
Whether companies are trading in oil and gas, agricultural commodities, rare metals or other commodities, they are finding that Singapore has increasingly become an even more strategic location.
While trading is clearly going through changes and markets are challenging, leading players in Singapore see themselves as well positioned to take advantage of the geography, financing and capital structures, regulatory environment and other benefits of a country positioned increasingly higher as an ever-easier place for the trading community to operate.