Akeredolu-Ale : Commodity Exchanges are Base of Economic Development

The Managing Director, Lagos Commodities and Futures Exchange, Mr. Akin Akeredolu-Ale in this interview with Kayode Tokede speaks on the role of commodity exchanges in economic development, How Nigeria failed to addressed the issue of commodities in a structured way and the country’s potential to compete in the global commodity ecosystem, improve Gross Domestic Product (GDP) by double-digit.

The SEC currently is regulating eight Exchanges and we have five commodity Exchanges including LCFE. What are the ways these Exchanges are creating wealth and their impact on the nation’s macroeconomics at large?

First of all, we need to understand the functions of commodity exchange and if you understand its functions, you will understand the primary role they play in any ecosystem, including the manufacturing sector. So, macroeconomically, commodity exchange is the base of any economic development and the commodity ecosystem determines the direction of any economy. The simplest example I’ll give is that the price of crude oil determines the price of petroleum products in finished products. The price of flour will at the end of the day determine the price of bread, and so on and so forth for various commodities. What we have done in the last 60 years in Nigeria, is that we have put the cart before the horse. We have been trying to activate our economy from the service sector. We pump money to the banks to on-lend to customers and then the banks make a good effort to on-lend to manufacturers, among other sectors. At the end of the day, these companies banks lend to, if the commodities don’t come at the right price and they have consumer’s resistance, then you start talking about the capacity of these institutions to be profitable. The moment these institutions are not profitable, then these manufacturing companies are moribund. Thereafter, these loans ended up with Asset Management Corporation of Nigeria (AMCON) as Non-Performing Loans (NPLs). Holistically from the beginning, if the pricing or availability of a commodity is not determined at the beginning, it is going to be difficult for the manufacturing sector to function and that is the role of commodity exchanges in the commodities ecosystem.  The exchange played its role in creating price stability and an organized market for the purchase and sale of enforceable contracts to deliver a commodity such as wheat, gold, cotton, or a financial instrument at some future date. We have not touched on or addressed the issue of commodities in a structured way.  Over the last 60 years, we have been arranging and working with commodities from the angle of an informal position. At a point in Nigeria, coal was sustaining our economy. For the last 60 years, crude oil has been sustaining our economy. At a point, groundnuts and Cocoa were sustaining our economy. All these things are commodities. If we know that all these are commodities that we need to sustain our economy, why can’t we build a structure around that ecosystem to be able to create wealth around it? Also, why can’t we create the multiplier effect of employment, engagement of people, expertise, transfer technology, and raise capital around that ecosystem? A lot of multinational agencies outside Nigeria and DFIs are always broken on how to create development finance in Nigeria, particularly in the agricculture space. Most of them have resulted into NGO and other means, trying to inject capital into the agriculture space. The agriculture space affects human capital directly and that sector is very crucial in economic development. These foreign investors have not been able to find a proper structure. If we have a commodity whereby they can see pricing, price discovery and proper channels through which they can inject capital into commodities ecosystem and Nigeria’s economy, they will find it easier to deploy capital into the agriculture space. That is how commodity exchanges function and start creating wealth, which at the end of the day, you will start to see the multiplier effect. If you look at our mission statement and our vision statement, it is very clear. We wanted to see how we can improve the growth of Nigeria’s GDP to double-digit. Nigeria’s economy is working at almost the bearish threshold and there is a lot of headspace to be able to grow our economy at a fast pace and develop it very well.

How has the Russia/Ukraine war sharpened the domestic and foreign commodities exchange?  

There is a negotiation for new world order and some of the mix people have created around certain currencies in the past has been busted now. What we’re seeing is that there is an opportunity for some developing economies to grow and it is time for them to be able to participate on the global stage. What that goes to show is that if you have a country of 200 million people that is an asset on its own; a very useful population is an assets. There is no economy in the world that can underrate Nigeria’s economy when it comes to consumption. Some people will say Nigeria is a consuming economy but it shows the potential of what we can be if we wanted to become a producing economy. We have three fallouts from Russia/Ukraine war. One of them is that we have been able to see the resilience of Gold, which is one of the asset classes that were traded on LCFE. Russia has been able to use gold very well to stabilize whatever they’re doing and they had amassed a lot of it before they started prosecuting the war to defend the Ruble. Then, you have the issue of Wheat produced in Ukraine and we have seen the multiplier effect of the invasion on Wheat globally. We could have expected that the multiplier effect will be more than what is happening in Nigeria. But you realize that Nigeria started at an earlier time, creating homegrown Wheat and the impact has not been as bad as some other parts of the world. Now you see that some people are prosecuting a war now, globally, and in essence, what they’re using to fight the war is commodities. If you know that countries can use commodities to fight a war, then you will understand the role of commodity exchange in the ecosystem.   It gets to show that commodities can be assets, at the same time, it can be weaponised, which has been done in the case between Russia and Ukraine. What that goes to show is that in the next two-three years, you will realize that for people writing off the economy of Nigeria, they will be shocked because Nigeria is a gas country. So, Nigeria is still a very formidable country. If you look at the distribution of the assets and resources in Nigeria, you’ll be shocked that Nigeria is a blessed country and I’ll let you repeat this. Nigeria, and Nigerians, we do not have any reason to be poor. We are working on Gold. We have shown the example for people to see the Gold coins during the inauguration of the LCFE in July.  Those Gold coins were mined in Osun state, Nigeria. We have arable lands to plant various crops in Nigeria and a lot of mineral resources to show the strength we have in our economy. LCFE is trying to deploy a solid infrastructure and solid risk management structure to support the ecosystem so that we can be able to participate on the global stage. We are working on bringing products that are of global demand standard with specification and we are happy that the LCFE is contributing to the ecosystem.

How prepared are you as regarding price discovery and transparency trading four assets classes on LCFE?

We have told everybody that cares to listen and I’ll repeat it here again that we are not commodity traders. A commodity trader is someone that gets a warehouse, buys commodities into the warehouse, and starts selling when the prices go up. If we wanted to be a commodity trader, we do not need the license of the Securities and Exchange Commission (SEC) to operate. We’re just a medium of exchange to give assurance for people that wanted to participate in that space. The assurance is that if you want to buy maize, among other commodities, ours is to assure you that we can deliver. It makes it easy for people to see how these asset classes are digitalized. So, they can have just paper notes to reflect them and if you decide you wanted to get your physical delivery, you can go and take it subsequently afterward. On the issue of price discovery and transparency, what we do is a two-way quote. A two-way quote in a situation where there is going to be threshold pricing; that is, the base price for anything. Then, the two-way quote allows that if you want to sell on the exchange, and you sell below the normal price on the exchange or a particular price globally, anywhere, there’s a system that mops it up from you; that’s a two-way quote. Now if you decide to sell above the global benchmark pricing, there is a system that will supply what you’re trying to buy.  The essence is to allow buyers to work in compliance with global best practices and people who are not farmers will have a reference price they can use to determine how they sale their goods. We do not buy retail from people and we do not sell but the aggregators are those who aggregate the goods from various farmers and they are the ones that visit the exchange because they are the ones that have financial structures in place. At the same time, when they go out to aggregate those goods in small bits before it turns into a large size, which is tradable on the exchange, it is always nice for the famers and people that are selling to have a reference price of how much is wheat so that they will be fairly guided when they are selling their goods. When you buy goods from them, and at the right price, it makes it easy for them to come back next season. If your price it below the expected price and kills their capacity for them not being able to visit the farm next season, you will not see them again when it was not profitable. However, when they have a reference point, for example, you decided to sale a particular product and you mentioned that the product is “X” amount, the farmer sees that the amount you have mentioned is below the price on the exchange, they will mention the price sold on the exchange, that is what we mean by transparency.

In the next three years, where do you think LCFE going to be and move to support the federal government in economic diversification?

I mentioned earlier that the key performance indicators we look out for basically, it’s about looking into our mission, our mission statement. It is when we start seeing our GDP moving from being single-digit growth to double-digit growth. If Nigeria’s growth had been moving by one-two per cent in GDP, and when witness a double-digit growth in GDP, it means we are going to have a multiplier effect which is expected to reflect on employment and productivity. If you have double-digit growth at least once in a three years period, it means that the size of economy would have doubled. What that means is that, effectively, it has a triple effect from the commerce side to the employment part of it and to more stability of Naira and trickle down to disposable income. We will see the effect on the purchasing power of money. Agriculture is still at the top of employment in Nigeria. Nigeria is enough to feed and we are still importing. We need to stabilize some of the things needed for our consumption in Nigeria. We needed to start looking at a future that is possible and start exporting to other West African countries. All that, you will discover that our commerce will grow, and our vision is to become a Pan African exchange; an exchange that is going to go beyond borders, beyond Nigeria to be able to participate in the African economy space and development. So, our aim is to support the federal government in its economic diversification through commodities formation and streamline digital trading of commodities with our trained dealers. 

What are you putting in place to make sure Nigeria’s crude traded on LCFE?

The reality is that our crude oil is traded outside Nigeria. If it is not traded, we will not get revenue from the trades.  It is when the crude oil is sold, that the payments are retired back to Nigeria. The question is, most oil-producing countries have energy exchanges and Nigeria is one of the very few countries that produce crude oil and does not have energy exchange. It is a journey of a thousand miles and we have taken some steps as we did with Gold. We have started the process and we are going to be warehousing independent Oil producers. Independent Oil producers are the ones with small oil field and produce 10,000 barrels/per day. When the government shows interest, they will begin to see the structures that allow us to trade our own crude in Nigeria instead of being traded and settled outside the shore of Nigeria. One of the major advantages is that it will attract float. Because if we sell our crude oil outside Nigeria, and the payments are residents with external banks outside Nigeria, how does it add any value to our local economy? You will discover that a lot of countries are looking inward to discover what assets they have to support their economic development and create jobs.

What are the benefits derived by a potential investor that plans to invest in Eko Coins?

You’ll be surprised since Eko Coins commenced trading in July 2022, investors have been observance and investors are buying it. But we see a lot of sentimental purchases right now. People wanted to buy and see if it is a real Gold coin and a lot of people wanted to feel the real Gold because they have not seen it before. Apart from the sentimental buyers, we have seen people that are buying it to hedge their portfolios as assets.

How are you attracting retail investors to the LCFE?

There are so many alternatives on the table. Most people would have decided to trade in Gold in Kilograms and it means we are talking in millions of naira. We decided to break it down to Coins, which is in the 50gram size. We are working on making sure retail investors invest in structured top risk free instruments and they should realize that no instruments you will start seeing returns in multiplies of 10 and 20 times. The reality is that you can get good tidy returns on investment from a structured approved tradable instrument by the Securities and Exchange Commission.

In the next 10 years, what are the targets for LCFE?

The beauty about Nigeria is in what some people refers to bandwagon effect. When Nigerian intelligent investors understand a particular asset class or reputable investment outlet, there is always a bandwagon effect; they will grow it. By the time Nigerians feel comfortable investing in commodity space, in the next 10 years, the private sector ecosystem of commodities will on its own support our economy without government intervention. Then, there will be a separate ecosystem running on its own on auto drive. We have it happening in the telecommunication sector supporting e-commerce and that is what is going to happen in commodity exchange ecosystem in the next 10 years.