ICAP taps Australia for growth

By Maureen Nevin Duffy
Published 02/17/2012

Plans exist to broaden products into Kuala Lumpur and Singapore

Despite global demand for all commodities ebbing over the last couple of months, interdealer broker ICAP tapped Australia as a new place to expand its commodities broking operations.

The firm, which set up its agricultural and soft commodities broking in Sydney this month, believes clients still need to hedge their exposures no matter what the supply/demand ratios are doing, according to Garry Booth, an ICAP broker who formerly led the three-broker team for MF Global, the Chicago-based futures broker that lost more than US$1bn of its clients’ money.

Booth concedes that “the volumes on most global markets shrank. But customers still have the desire to access liquidity pools to hedge away risk.”

Commodity forecasters such as Shawn Hackett of Hackett Financial Advisors would agree. He is shorting commodities right now and expecting downward price pressure at least into the summer of 2012, when he expects a hard landing in China to bottom out commodities for a return in 2013–14.

Hackett, who publishes the Hackett Money Flow Commodity Report, a monthly newsletter covering all the agricultural commodity markets, said commodities lost 25% of their value this year, a situation he doesn’t expect to pick up for at least eight months. He reasons that coal, which he calls the most non-correlated commodity against the agricultural products, lost 38% of its value – a sign, he says, that all commodities will follow the path of the others due to the world’s linked markets.

“If soft commodities are going down, they all are,” said Hackett. “And there’s no place to hide – hard or soft.”

But ICAP, though, is prepared for any further slide or possible upside. The firm has seized the opportunity to roll out a ready-made specialist team in agriculture and soft commodities with 10 years experience in the Australian region, according to Booth. The operations, he says, close the gap between already established offices in Europe and in the US with Asia.

ICAP plans to broaden the product base into Kuala Lumpur, Singapore and “wherever clients have exposures”. It already provides broker execution services in New York, Chicago, London, Sao Paulo and Louisville.

From Sydney, Booth’s team plans to trade with the Matiff, the NYSE Euronext, the CBOT, CME, ICE and ICE Canada Futures in grains, wool, cotton and sugar. The group will offer broking services in cotton, corn, milk cocoa, coffee, canola and sorghum.

Booth added that though concerns still run high over the fallout from MF Global’s accounts, any losses on the commodities side have not completely discouraged investors from putting money to work.

“I think every customer who’s got exposure in there does have concern, however if they’re going to continue to have exposure in the market they need to manage that exposure,” he said.

Going forward, Booth notes that a large part of the monies associated with MF Global will be returned to the customer. ”They are returning to the domestic grain futures exchange,” he said. “We’re looking forward to helping them manage the risk in this growing market.”

Unlike MF Global, ICAP does not act as a clearing agent for customers.

Market participants may indeed keep hedging their exposures while others might weigh up whether to shift from soft to hard commodity assets, market participants say. Still others could pull out of commodity markets altogether, possibly going to cash, until market forces realign.

Some bright spots, however, still exist. The droughts and heat waves that baked the US West and Midwest last year did not inflict the corn and grain shortages on world markets that were projected. In fact, some regions produced bumper crops.