ECX in gear-shifting mood

Ermias Eshetu is CEO of the Ethiopia Commodity Exchange (ECX). Ermias has over 20 years of technical and leadership experience working for fortune 500 and multi-national companies including IBM, Alcatel, Orange and MicroStrategy. In addition to his leadership experience, Ermias brings a wide range of technical expertise in the areas of software engineering and business intelligence solving complex business problems. Prior to joining ECX, he held various posts including Board Director, as member of the Executive Management team and most recently, served as Vice President for Marketing and Corporate Services at Zemen Bank.
He received his Master’s Degree in International Business from Manchester School of Management and a Bachelor’s degree with honors in Computation at UMIST, in the United Kingdom.

Traditionally, ECX is an organization that was almost synonymous with its creator and founding CEO, Elleni Gebremedihen (PhD). After the departure of Elleni, it was Anteneh Assefa, also from the banking sector, who took over the driving seat. But, the replacement could not serve for long due to health complications. Later on, Ermias joined the ECX whose management at the time was a bit shaky due to leadership turnover. One year since he assumed the post, Ermias is now saying the commodity market is on the verge of ‘shifting its gears” as it is making a milestone move to adopt an e-trading platform. Asrat Seyoum of The Reporter sat down with Ermias this week to discuss some of structural challenges ECX faces and to expound on the way forward. Excerpts:            

The Reporter: What would you say are some of the milestone achievements that you have accomplished over the course of the past one year since you took over as CEO of ECX?

Ermias Eshetu: The first thing that was on my agenda when I took over as CEO was to ensure management stability as it was a bit shaky due to turnover of top leadership of the institution. We have worked to tighten the institutional framework so that the management would function normally regardless of change to the top leadership (CEO). The other focus area was stakeholder engagement. As you know, ECX has a number of stakeholders in the overall value chain that extends from the farmer to the final commodity exporter. Generally, the perception about ECX was not that positive when it comes to engaging the stakeholders. We were perceived as an institution which does whatever it deems has to be done without accommodating stakeholder feedback and interest. So, now, I can say that we have a good working relationship with our stakeholders both in the policy circles and those we interact in our day-to-day operations. On the other hand, we have also been working to restore the brand ECX as a well-known commodity exchange in the world. We really have to do little since whether one likes it or not ECX is one of the most recognized African success stories of our time. Plus, we had to settle all the doubts and reservations with regard to ECX in connection with the change in top leadership across the years. Furthermore, we also had to revisit our business strategy and the perception that ECX is a market that solely serves the commodity export sector.  This is because of our higher focus on the high-value cash crops like coffee and sesame. As far as the policy is concerned, ECX is not meant to be a central commodities market for the country which will cater to most of the commodities trading in the country. So, the vision is to have an independent, solid central market which has integrity. Hence, we explored in our business strategy what other commodities we can incorporate into the ECX system. So, recently, we are working to incorporate red pea beans and klugmn beans to trading system. We can’t just include an additional product to the trading floor; there are some procedures to follow like devising the product standard and legal framework. Generally, we have tried to clearly articulate our business strategy in the sense that where we want our selves to see in the five years are clearly indicated in the strategy document. While these are generally the non-operational milestones over the past year, we also have done some work with regard to electronic trading, enhancing traceability and spinning off the warehousing services.

One of the objectives when ECX was first established was to avoid systematic collusion and insider trading in commodity markets across and especially in commodities like coffee (back in the days when it was an auction system).  Some seven years since its establishment, EXC is still criticized for not being able to dismantle insider trading and/or collusion. What do you say to that?

First of all, regardless of the value, all commodities are equally important to us at ECX. With regard to market integrity, we do know that our commodity exchange is a system where close to 1.2 billion dollar is transacted annually and this is a significant amount for the nation; hence we think we are nothing without integrity as a commodity exchange. If our market integrity is shaky and if it erodes the market participant’s confidence, we will be in trouble as commodity market. Our growth prospect is bleak at best without having the integrity and the confidence of our participants. So, it suffices to say that market integrity is a pillar for us and for any market for that matter. In general, what we call insider trading or collusion is any form of trading or transaction that is conducted between two parties in a less transparent manner. It is a crime which is punishable by law. So, as I have told you earlier, we cater for 1.2 billion dollar annually in an open-cry-out trading system and where there is a lot of interaction among traders. As much as possible, we try to monitor each and every activity that is going on in the trading floor from early morning until five in the afternoon. However, we can never say that it is 100 percent clean from any form of insider trading or collusion activities; it is very difficult to do so. Even in the most experienced exchange markets like the Chicago Mercantile and London Stock Exchange there are always questionable traits from the perspective of market integrity. One thing that is guaranteed is that people would always try to circumvent the transparency of the trading system in any country. So, keeping the integrity of the trading system is a constant battle as the system of manipulation is also highly dynamic. It is largely about people’s behavior and gaining experience on how to deal with insider trading. Hence, it is prone to error; and I would not be surprised if the ECX is criticized for such gaps.  We have a business conduct and compliance team, which specifically does follow up work on such issues. By the way, the investigation team does not incorporate ECX’s personnel alone, it is a team pooled from various stakeholders since the matter is highly sensitive and engaging at the same time. The team investigates and arbitrates such cases non-stop; for instance last year we  reviewed some 2000 such complaints. Perhaps the most important measure that we took to this effect is our move to electronic trading. Imagine, now we are catering to six or seven commodities, but what if the number of commodities were more; or what happens when other commodities come under the ECX umbrella? We would definitely have our hands full. But, electronic trading would significantly reduce human error and would help to mitigate insider trading considerably. If you see, the electronic trading platform, it leaves less more for any collusion since even the jacket that traders ware on floor will now be the same. The trader would be assigned a random computer to conduct electronic trading and they would have nothing but quality standard, quantity and price on their computer screens. So, the traders would have no idea as to who is offering what. There is no way of knowing who is offering certain quality, quantity or price for certain commodity; the contracts would be the sole entity that is traded.

There are also some who argue that ECX at this moment when even agricultural production is too small or marginal at best is a white elephant institution. And reasonably, the level of the country’s production is not worth a modern commodities trading system. What would you say to them?

Let me give you an example: for a long time cobblestones were not produced locally although we have the raw material and labor to produce it. But, we imported it from abroad. Now, cobblestones changed to a product or commodity when we saw that the demand and the market are there locally. Similarly, I would say yes production is still small in Ethiopia but the existence of the market will definitely have production encouraging effect. When you are confident that there is a market which is free from middlemen and is able to offer you a reasonable price to your output, you would be motivated to increase the yield in your commodity. So, I don’t think that there is no question about the importance of the existence of the market since it provides an important impetus to increase production.

Recently, you decided to separate the warehousing service (including the quality grading) from the trading institution (the ECX). But, commentators argue this move would degrade confidence on the trading floor since guaranteeing the quality of commodities is a critical element of what the trading floor offers as a service. Was this considered?                                            

There were a lot of exchanges in Africa which came up but failed to survive as a sustainable institution. Starting from zero, we now have a viable commodity market. We have been building our capacity slowly and now we are at the level where we conduct electronic trading. At the same time, the level of transaction we cater to is rising and we have to think about how we can carry on managing the central exchange and administer over 65 warehouses scattered across the nation. It was getting a bit out of hand. So, what we did was establish a team from the various stakeholder government institutions to sample what the best international experience says about the management of an exchange. So, one of the findings of this survey was that the central exchange is to stand by its own to execute its responsibility diligently. Hence, we decided to spinoff the warehousing services. However, this does not imply that the exchange would not have any control over the quality of commodity that is traded. It is the exchange that promulgates the quality standard; it is the exchange that devises the contracts and licenses the warehouses. This is supported by the international experience; if you see in the case of most advanced exchanges, the commodities that will be traded in the exchanges would be stored only in warehouses that are certified by the exchange. If you ask what exchange certified means it considers the quality of the product, the capacity of the warehouse personal and the logistical aspect in connection with the warehousing facility. By the way, for now, warehousing service that would be relevant to Ethiopia is only dry warehousing; in other countries colds storage facilities are quite popular for commodity exchanges. To that effect, we recently certified some 300 warehouse profe4ssionals for a period of one year. So, we want a lot of things from the warehousing enterprise. We are selling contracts and when we do that, we are selling the warehousing facilities and their standards at the same time. What we did was an administrative division; not functional.

As long as we are discussing quality, there are a lot of complaints from your clients with regard to quality. They say that the quality delivered is not the quality promised. What are you doing to improve these conditions?

This forces us to look into the issue of how ECX would insure quality of the commodities it trades in the reading floor. The first step is when the product (commodity) arrives at the doorsteps of our warehouses; there we will take samples (3 kilos per truck) and inspect for quality. The procedure dictates that we use a random sampling technique from any of the bags in a truck. Now, still a lot is done via people-to-people interaction. The complaints largely claim that some suppliers using their connections to the warehouse personnel can directly bring one full bag of any commodity and register it as a sample. This, although highly debatable, is not our focus as an institution. However, the ultimate solution is to bring about the electronic revolution. So, when we say an electronic revolution, this incorporates fitting each and every warehouse with state-of-the-art security cameras. So, when each truck arrives at an exchange-certified warehouse, it will be under the watch of the security cameras. Furthermore, sampling and transferring of the commodity to the quality laboratory would still be under the watchful eyes of the security cameras. We will have security cameras everywhere; in the parking lot, sample extraction area, quality laboratory, around the scales, inside the warehouse and of course will have them on entrance and exit points. Now, in addition to the security cameras, we will also have a universal traceability system which will help us in identifying where and how each and every bag of commodity is obtained and passed through the ECX trading system. I believe the combination of the two systems would eventually minimize such problems and complaints. Nevertheless, these security cameras and the traceability systems we are trying to install are inherently very expensive technologies. The traceability project alone costs 4.5 million dollars and the security cameras, which will be useful in these situations, are also very expensive, each costing up to 1000 dollars.

Another outstanding issue with ECX is the price of some of the major high-value cash crops of Ethiopia. Frequently, the price in the trading system was found to be significantly higher than the international standards or the local price fails to adjust to the variation in global markets quickly there by robbing the commodity export sector of its price competitiveness. What are you doing in this regard?

If you have noticed, we have recently decided to shrink our coffee contracts. For instance, we used to have up to 10 quality grades in our coffee contracts but now we downsized it to five. The fact of the matter is that Ethiopian coffee has over 1000 varieties; if we, say bring this to international market and find reference coffee varies to each, then it will be next to impossible. For instance, if we take New York coffee as a reference, to which one Ethiopian coffee variety is comparable to it, will be very difficult to work out. If you take crude oil, you can compare it with crude oil from New York or London it will make sense. But, when it comes to coffee, it is highly subject to the test of the consumer; it is difficult to peg with any one reference market. Now, the contracts we offer at ECX are inherently different from or more diverse than the attributes of coffee contracts in other markets. So, if you have a coffee or any other commodity contract that is consistent with the international markets it will be easy to take on specific reference market and measure the price according to the variation in the reference markets. If you have consistent contracts with international markets, for instance, in quality, test and in volume, then you can bother about going in parallel with the price variation in the global market.  From the very inspection, ECX is tailored in way that caters to the local commodities. At best, the reference markets would help in remote benchmarking, in the sense that the traders could gauge the contracts and the prices; but it can’t be an exact match. For example, Yirgachefe coffee could be taken to enjoy a certain percentage premium over/under the reference market. This benchmarking is merely meant to provide references for the commodity trader which they can use to devise its negotiation strategy.  Nevertheless, ECX is a unique market which is not identical or cannot be exactly comparable to other markets. Take the tire and sesame contracts, for example. For tire is consistent around the globe, the price of tire in the exchange could be argued to be parallel with rest of the world. But, Ethiopian sesame is a premium product there is no perfect substitution for it in the international market. So, we can really argue that we fix its price consistent with price of sesame elsewhere in the world for they vary in quality greatly. In fact, in terms of sesame the Ethiopian market is a reference market since the production volume as well is one of the highest in world. So, when you have volume you would have the opportunity to dictate the international market. Personally, I don’t believe at this moment we have to work to benchmark our commodities against the international market.

But if you consider other sesame producers, even in Africa, the likes of Nigeria are now selling high-premium sesame (Madiguri) which is said to be closely comparable to Wellega or Humera grade Ethiopia sesame. Yes, we can debate whether Nigerian sesame is comparable to Ethiopian high-premium sesame varieties or not. However, if both have similar destination markets (china in this case) and the buyers perceives the two are close substitute to one another, and if ours is always expensive (because we think it is high quality) how are we going to be competitive in terms of price? Is it not the sales volume that matters at the end of the day?

If we are talking about competitiveness in the international market, ultimately we are talking about host of other factors like quality, product source and cost factors such as logistics besides the final price. I think the question should be how we can be competitive in the international market. And there are a lot of factors that affects competitiveness in general. As I have said, for Ethiopia logistics is one primary factor while other factors such as reliability in terms of delivering the promised quality of commodity to the destination also count. All of these are added up to your competitiveness in global market. However, as a commodity exchange, I believe, what we need to do is work to develop ECX as a reliable and recognized commodity exchange brand internationally. For that, we need to keep the integrity and independence of the market institution. We are not there yet; so we have to work hard to be recognized as exchange. Yes, I do believe that we need to be competitive in the global markets but to do that we have a small part to  play which I outlined above. But, to make it happen, it takes the concerted effort of various stakeholders.

I do know that ECX alone cannot improve the competitiveness of nation’s major exportable commodities; it is the traders (both suppliers and exporters) who have to adjust their contracts and prices according to the global market trend if wish claim a greater share of the internal market. But, in terms of awareness raising and assisting the traders to get the right information to make an informed market decision, what are the steps are you taking at present? Isn’t it a concern to ECX?

As a matter of fact, market data dissemination is one of core areas that we are focusing on at present. One thing is for sure, we do have rich market data. Since our establishment, we keep track of all the contracts that are executed through ECX. Now, we are working on a system which will enable us to massage and compact our market data and provide it to end users like the Bloomberg, Reuters and other domestic institutions like Universities. Still we do share some of our rich market data at present; however, we are thinking strategically to disseminate this data on a regular basis. It is also a resource and major revenue source if you think about. For instance, big exchanges like the Chicago Mercantile drive 1.2 billion dollars in revenue annually by availing this market data to end users. We also know that this market data should be shared with care since it could be used to manipulate the market itself. If this is not done right, it has a risk, for instance, in terms of sending the wrong message to the global market. For example, if market data disseminated indicates Ethiopian coffee appreciating fast, we might end up hurting our coffee market globally; or if it says Ethiopian coffee has decline, we will risk reducing the value of Ethiopian coffee. So the balance has to be there. We are now thinking how we can offer this data analytically. For instance, how can we develop the Ethiopian coffee index? If we were to develop this, it could be a meaningful index; an index that can be used as reference for coffee market transaction globally. However, it is not an easy task,  it requires careful deliberation and strategizing.

I understand recently you are working to incorporate red pea beans to ECX floor. However, although it has been a while since you included white pea beans, still traders complain that around three-quarters of total white pea beans production is not passing through ECX. Apart from having the mandate by law, what can you do to ensure compliance?

Although I don’t know about the figure that you mentioned, there is no debate that everything has to pass through the ECX and the country should get what it should from this commodity. However, we do recognize the problem; and the issue of white pea beans has been raised in some of our stakeholder meetings. That said, you have to know that this is not something that ECX can do by its own; it takes a concerted effort from other governmental agencies. To that end, the Ministry of Trade, the Ethiopian Revenues and Customs Authority (ERCA) and the National Bank of Ethiopian have greater roles to play. They have duly noted the problem and are taking measures.

Since before the departure of its founding CEO, Elleni Gebremedihen (PhD), there was a dream of diversifying to the commodities’ futures market in ECX. Where is that dream today?

Basically, an exchange cannot rely on spot market forever; it is just foolishness. This is because just as an individual is keen to plan for the future, organizations as well want to understand what the future holds in terms of production. For instance, a certain food processor would want to know what the wheat market is going to look like in the foreseeable future. Hence, any commodity exchange cannot expect to serve a forward looking market in sport market trading forever; it has to include futures contracts at some point. As far as ECX is concerned, we still continue to explore the futures market arena. We continue to do our studies. If you look at the global financial market at moments, a host of tradable derivatives are generating massive gains to economies. Even interest rates on certificates that are bought from the central banks are now entering into this derivates market. So, we are doing our studies continuously to understand how we make those moves. We are trying to understand what the regulatory and policy frameworks would look like. However, this does not mean that we are going to go into futures trading platforms tomorrow. We still have a lot of commodities that need to be included in the ECX. The Essence of ECX is to create a market that is useful to the Ethiopian farmer. In that regard, we still have a lot of commodities that need to be furnished with modern and transparent market. Meanwhile, we are going to keep building our capacity to make the necessary move when it is deemed appropriate to our condition.

Also you were quoted by Bloomberg as saying that ECX is keen to trade any form of stock, be it a derivative or an agricultural commodity. Do you think it is reasonable for a commodity trader to think about diversifying horizontally to securities trading?

Yes, there are subtle differences between the commodities trading and securities trading systems. But, I believe what we should think about is how we are going to leapfrog. If we see things conservatively and argue that just like Europeans we should follow different tracks and nurture our commodities and securities platform differently, then we are going to take two hundred year to reach where they are at the moment.  I don’t think that is wise. We have to be innovative on the approach that we want to pursue when we are playing growth catch-up. Now, we are developing the necessary local capacity. Recently, for example, we have trained and certified some 500 e-traders. Some of these certified traders are not well educated people; so if we can certify people who never went to high school to be an e-trader, we have to think what others think we can accomplish with this local capacity. Now, the chances that some of these people could become professional brokers some day are really high. For example, in South Africa, the stock exchange and commodity market have merged together. It should not be a religious belief; we can say that the two/should not mix under one trading platform under any condition. Previously, the regulatory complications and other parameters were an impediment. Now, the technology itself allows for such innovation and I think we should capitalize on these advantages. For example, when we say, derivatives we are not necessarily saying that the derivatives are the same derivatives that western exchanges trade. We can carve out our own derivatives, derivatives which benefits our farmers.

We also know the National bank of Ethiopia is building a secondary market for bonds. Given your view on the issue, do you want a piece of that action? Were you approached by the bank?

So far, I had no direct discussion with the national bank regarding this issue. But, I am aware of the project from various forums that the bank has organized. We have a capacity at ECX; this capacity is continuously growing and evolving. Since ECX’s resources and capacity are the country’s resource, I think it is good to exploit this resource properly. On our side, I have to admit that we have not approached the bank about the capacity and resources that we have, the work we do and the experience we have accumulated in the field. If there is a chance that we can make alignments on this issue, we will make the engagement when the time comes. However, we have to know that central banks have a lot of aspects to consider such as the rules and regulation, legal framework and so on. So, if the bank sees the room for collaboration and using our resources in this regard, we will be willing.                                                                                                                                                

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