'Cross-border mercantile listing can help eliminate under-invoicing' an interview with CEO Arif Habib Commodities (Pvt.) Limited

Ahsan Mehanti is the Managing Director and CEO of Arif Habib Commodities (Pvt.) Limited. A Chartered Accountant by profession, Mehanti holds extensive experience in the areas of commodities investment, brokerage, research, advisory, and investment management, including spot and future trading with Pakistan Mercantile Exchange. He has spent more than a decade working with Arif Habib Group; previously, he was associated with Arif Habib Investments, the buy-side fund which was later merged with MCB Investments.
BR Research recently sat down with Ahsan Mehanti to discuss the issues facing commodities trading sector in Pakistan and his views on the sector's future as one of the largest players in the market. Excerpts are produced below:
BR Research: Arif Habib Commodities seems to be a recent player in the industry as the company is only six years old. How has the journey been so far?
Ahsan Mehanti: Arif Habib Commodities Limited (AHCL) was incorporated in 2012; however, the group is a pioneer in commodity trading in Pakistan. When Pakistan Mercantile Exchange (PMEX) was founded in 2005, the Arif Habib Group became one of the first members of the exchange through Arif Habib Limited (AHL), group's primary sell-side arm and brokerage firm. AHCL was formed as a fully-owned subsidiary of AHL, and we are full members of Pakistan Mercantile Exchange ever since.
BRR: What is the ownership & regulatory structure of PMEX? Tell us about your group's history and current position in the sector?
AM: PMEX is majority-owned by Pakistan Stock Exchange, both of which are regulated by Security & Exchange Commission of Pakistan (SECP). PMEX currently has more than 400 members; all of them are mandated to be incorporated bodies by law.
At PMEX, AHCL is the largest player as majority of the investors are engaged in commodity trading at the exchange trade through our window. In addition, we also function as a market maker. A market maker is an institution or individual whose main function is to provide liquidity and price references for market participants, especially in new products or products with low trading volumes.
Our client-base includes mutual funds, commercial banks, and fund managers (functioning in individual capacity); although a large chunk of our clients are individual investors.
BRR: Tell us about the nature of transactions currently allowed at PMEX and the commodities traded in?
AM: Trading at PMEX primarily takes place in two forms: physical and futures trading. Physical commodity trading is currently carried out as spot transactions only; with trading concentrated in commodities in grains of wheat and rice. Recently, AHCL received the National Medal of Innovation award for managing first of its kind physical delivery of chili to a local food company.
Physical trading is a growing and beneficial trend for farmers as it allows them early settlement period of up to five days and accessibility of payment electronically. During last financial year, total value of physical trading contracts entered went up to Rs 500 million. We have up to 200 farming clients in the country, based in Sindh and Punjab.
AHCL has 100 percent share of physical trading carried out through PMEX. Futures' trading in physical commodities requires a market maker which is currently lacking as investors are climbing the steep learning curve.
We hope to see more physical commodities trading in sugar, cotton and palm oil, which are, currently, listed as futures contracts but see little to no activity in physical trading.
BRR: And what is the situation of futures contract trading? Does local news or international factors drive prices in futures trading?
AM: Future contracts listed on the exchange include ten currency futures; precious metals including gold, silver and copper; oil futures, including Brent crude, WTI crude; among others. Sixty percent of trading volume in futures is concentrated in commodities, whereas the remainder is concentrated in currency trading.
Gold and crude oil futures evenly divide the commodity trading volume at about 40 percent of the pie, each; whereas, the remaining 16 percent of commodity trading is dominated by various other precious metals.
Major currencies traded include USD, JPY, EUR, AUD, CAD, & CHF, among others. Currency trading is driven by fundamentals and mostly impacted by the Federal Reserve's monetary policy announcements, employment data, international oil inventory, and global corporate results forecast.
Local influencers can affect pricing of spot contracts in agriculture commodities; however, future contracts - whether in precious metals or commodities such as cotton - move with international trends. Therefore, any manipulation is limited to physical trading, which is monitored very vigilantly by SECP. Further, note that maximum volume of Rs 500 million was achieved in physical trading last year, which is very minimal.
BRR: Recently, there has been news of cross-listing of commodities with China & Iran? Tell us more about that.
AM: PMEX has recently entered bilateral contracts with Turkmenistan, Belarus, Malaysia, China and Iran to cross-list commodity-based products from each market on the other country's exchanges. These contracts shall be based on physical delivery. The idea is to encourage trade of agrarian commodities of both countries such that more export is generated in our favour.
The biggest challenge, of course, is restrictions on free movement of trade. For example, there are restrictions on rice trade with Iran, so there has been little development on that front despite the MoU.
Similarly, we need to ensure that our product is competitive in pricing and quality if we are to generate cross-border volume.
One significant impact of exchange-based trade would be curbing of under-invoicing as exchange volumes cannot be manipulated. We have the resources available for successful management of cold chain as we did for local trade of chili by entering logistics contract with Agility Inc., and quality control and testing agreement with SGS International.
As AHCL has 100 percent share of local physical trade, we expect to be the major player in cross-border listings executions as well.
BRR: Does PMEX offer any Shariah-compliant product in its offering?
AM: Murabaha transaction was recently added to listed contracts on the exchange; it was also piloted by our house. The idea is to create a mechanism allowing Islamic banks to invest their excess liquidity with commercial banks by using crude oil as the underlying product.
The pilot transaction was run between two Islamic banks; however, final approval is currently pending with the State Bank of Pakistan for Shariah compliance. Since the mechanism of future contract fixes the price, effectively, there is no exposure to crude oil price movement.