In an attempt to strengthen its oil futures market, yesterday, CME Group Inc. (CME - Analyst Report) announced the acquisition of another 25% stake in the Dubai Mercantile Exchange (DME), thereby owning 50% of this Dubai’s commodities exchange in total.
The DME was established as a joint venture (JV) between the Dubai and Omani governments and the New York Mercantile Exchange (NYMEX) in 2007. However, following the acquisition of NYMEX by CME, the latter got a one-fourth stake in the DME.
While CME doubled its stake in DME, the Oman Investment Fund had raised its ownership to 29%, leaving Dubai Holdings with a 9% stake. The remaining 12% of DME is owned in tidbits by firms such as Morgan Stanley (MS - Analyst Report), JP Morgan Chase & Co. (JPM - Analyst Report), Goldman Sachs Group Inc. (GS - Analyst Report), Royal Dutch Shell plc (RDS.A - Analyst Report), Concord Energy and Vitol. The shift of interest was part of the recapitalization process initiated by DME to restructure its debt.
Hiking its stake in DME appears to be a strategy growth step for CME, which has been firming its global footprint in the energy sphere for long now. Additionally, as CME has already been launching its crude oil futures and options contracts on the globally leading Brent and light sweet crude oil (WTI) benchmarks, initiating crude oil futures through DME would further enhance its reach in the rapidly developing markets of Middle East and Asia.
Moreover, DME being out of the Organization of the Petroleum Exporting Countries (OPEC) enjoys liberty of price discovery and is open to testing new risk management products. These factors pave scope for DME to stay ahead and quickly acclimatize to the consistent changes in global industry dynamics. DME also aims to grow as a benchmark for new crude oil futures contracts in Middle East and Asia, and price these contracts within the region as most of the crude oil is generated in the Middle East.
Hence, being a part of such an attractively positioned mercantile exchange could further prove to be a feather in CME’s cap in the long run. Meanwhile, the company is head on heels to expand its market share by leaps and bounds. CME is also eyeing London Metal Exchange (LME) to enhance its metals exchange, Comex, and strengthen its competitive position in Europe. The company had participated in the preliminary bid to acquire LME, which closed last week.
Overall, we believe that CME’s efforts to promote, expand and cross-sell its core exchange-traded business through strategic alliances, meaningful acquisitions, newer product initiatives along with its global presence will generate a decent growth in the long term.