commodities : international environment & trading (ofin 2290a)
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Commodities : International Environment & Trading (OFIN 2290A). Franck Pradier – Commodities Derivatives Trading– February 2008. 1 –International Commodities Trading. History of Commodities. - PowerPoint PPT PresentationTRANSCRIPT
Commodities : International Environment & Trading (OFIN 2290A)
Franck Pradier – Commodities Derivatives Trading– February 2008
1 –International Commodities Trading
2
History of Commodities
Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness.
The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets. For a commodity market to be established there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another. The economic impact of the development of commodity markets is hard to over-estimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade.“
Commodity exchanges began in the middle of the 19th century, when businessmen began organizing market forums to make buying and selling of commodities easier. These marketplaces provided a place for buyers and sellers to set the quality, standards, and establish rules of business. By the late 1800s about 1,600 marketplaces had sprung up at ports and railroad stations.
The London Metal Market and Exchange Company was founded in 1877 but the market traces its origins back to 1571 and the opening of the Royal Exchange. At first only copper was traded, lead and zinc were soon added but only gained official trading status in 1920.
The Chicago Board of Trade was founded in 1848. The NYBOT in 1870. The NYMEX in 1882. The COMEX in 1933.
3
Commodities World Map
US: Oil, NG (19%), Coal (20%), Ethanol (35%), Gold Silver, Alu, Copper, Lead, Wheat, Corn (41%), Cotton, Soybean (38%), Sugar
China: Oil, Coal (42%), Ethanol, Gold, Silver, Base Metals, Steel, Corn, Cotton, Soybean, Wheat
Brazil: Oil, Ethanol (35%), Alu, Coffee, Soybean, Sugar
South Africa: Oil, Coal, Gold (12%), Platinum (78%)
Russia: Oil (11%), NG (22%), Gold (7%), Silver, Alu, Nickel
Australia: Oil, Coal, Gold (10%), Silver, Alu, Copper, Lead, Nickel
India: Coal, Ethanol, Alu, Cotton, Wheat
Canada: Oil, NG (7%), Gold, Silver, Lumber
Saudi Arabia:
Oil (12%), NG (3%)
4
Key facts
1. Physical Commodity trading represents around :
Where: Crude Oil $3 120 Bil Refined Products $3 600 BilElectricity $1 000 Bil Natural Gas $ 800 BilCoal $ 700 Bil Emissions Eur 48 BilWheat $ 50 Bil Cotton $ 20 BilSugar $ 40 BilAluminium $ 101 Bil Copper $ 132 BilZinc $ 28 Bil Steel $ 700 BilGold $ 82 Bil Silver $ 13 Bil
Commodities Derivatives Trading represents in comparison : $ 300 Bil turnover /day
2. Commodities markets have some intrinsic characteristics:
High Volatilities & SpikesLong term trendsSeasonalityHigh speculationPhysical deliveryVery sensitive to International PoliticsPrice not all the time driven by fundamentals like production, stocks…Each commodity markets have their own regulation & standards Energy Commodities have a strong interrelationship together
5
Trends & Cycles
6
Trends & Cycles
7
Trends & Fundamentals
8
Interrelationships within the energy market
Emissions
Power
GasLPG
Oil ProductsCrude Oil
Refining Margin
BioFuels
Coal
9
Crude Oil West Texas Intermediate
40
50
60
70
80
90
100
110
Jan-0
5
Mar
-05
May
-05
Jul-0
5
Sep-0
5
Nov-05
Jan-0
6
Mar
-06
May
-06
Jul-0
6
Sep-0
6
Nov-06
Jan-0
7
Mar
-07
May
-07
Jul-0
7
Sep-0
7
Nov-07
Jan-0
8
Mar
-08
$/bbl
+210% in 15 months
10
US Gasoline RBOB
120
140
160
180
200
220
240
260
280
Oct-0
5
Dec-0
5
Feb-0
6
Apr-06
Jun-0
6
Aug-06
Oct-0
6
Dec-0
6
Feb-0
7
Apr-07
Jun-0
7
Aug-07
Oct-0
7
Dec-0
7
Feb-0
8
+185% in 15 months
11
Coal API2
40
60
80
100
120
140
160
Mar
-05
May
-05
Jul-0
5
Sep-0
5
Nov-05
Jan-0
6
Mar
-06
May
-06
Jul-0
6
Sep-0
6
Nov-06
Jan-0
7
Mar
-07
May
-07
Jul-0
7
Sep-0
7
Nov-07
Jan-0
8
Mar
-08
+320% in 26 months
12
Gold Spot
220
320
420
520
620
720
820
920
1020
Jan-0
2
Apr-02
Jul-0
2
Oct-0
2
Jan-0
3
Apr-03
Jul-0
3
Oct-0
3
Jan-0
4
Apr-04
Jul-0
4
Oct-0
4
Jan-0
5
Apr-05
Jul-0
5
Oct-0
5
Jan-0
6
Apr-06
Jul-0
6
Oct-0
6
Jan-0
7
Apr-07
Jul-0
7
Oct-0
7
Jan-0
8
+350% in 6 years & +150% in 8 months
13
Corn
100
150
200
250
300
350
400
450
500
550
600
Jan-0
2
Apr-02
Jul-0
2
Oct-0
2
Jan-0
3
Apr-03
Jul-0
3
Oct-0
3
Jan-0
4
Apr-04
Jul-0
4
Oct-0
4
Jan-0
5
Apr-05
Jul-0
5
Oct-0
5
Jan-0
6
Apr-06
Jul-0
6
Oct-0
6
Jan-0
7
Apr-07
Jul-0
7
Oct-0
7
Jan-0
8
+250% in 16 months
14
Soybean
300
500
700
900
1100
1300
1500
1700
Jan-0
2
Apr-02
Jul-0
2
Oct-0
2
Jan-0
3
Apr-03
Jul-0
3
Oct-0
3
Jan-0
4
Apr-04
Jul-0
4
Oct-0
4
Jan-0
5
Apr-05
Jul-0
5
Oct-0
5
Jan-0
6
Apr-06
Jul-0
6
Oct-0
6
Jan-0
7
Apr-07
Jul-0
7
Oct-0
7
Jan-0
8
+300% in 15 months
15
Wheat
200
400
600
800
1000
1200
1400
Jan-0
2
Apr-02
Jul-0
2
Oct-0
2
Jan-0
3
Apr-03
Jul-0
3
Oct-0
3
Jan-0
4
Apr-04
Jul-0
4
Oct-0
4
Jan-0
5
Apr-05
Jul-0
5
Oct-0
5
Jan-0
6
Apr-06
Jul-0
6
Oct-0
6
Jan-0
7
Apr-07
Jul-0
7
Oct-0
7
Jan-0
8
+416% in 15 months
16
0
100
200
300
400
500
600
700
800
900
1000
Base Metals
Price of H.G. Aluminium relative to other base metals
Nickel
Zinc
Aluminium
Copper
Jan
200
3 P
rice
= 1
00
17
Functioning of Physical Markets
Physical markets are OTC markets where producers sell commodities to physical traders or other producers.
They need to take care of Freight & Insurance (FOB – Free on Board vs CIF) but can pay for them.
Practically there is plenty of different qualities for each commodities : -for Crude Oil: 6 for North Sea, 11 in US, 7 in Canada, 12 for the OPEC basket. A total of more than 100 different quality of crude oil is traded across the world. -for refined products: in Europe there is 50 different products available – each can be FOB or CIF. Worldwide that is maybe 200.
The spot price assessment is a method defined by an external organisation (Platts, ) to fix a closing price of a commodity each day. They define that as “the latest range in which a standard repeatable transaction takes place or could take place at arms length”.
18
Functioning of Derivatives Markets
The Commodity derivatives markets were set up to enable commodity actors to hedge their future consumption or production in order to be able to smooth their future profits or costs. After few years speculators used these markets to punt aggressively.
Each market disposes of a Forward curve: for each standard maturity you can enter into a forward agreement (Buy or sell). This forward curve represents the perception of the supply-demand at each expiry date. Ex: for Crude Oil WTI you can trade each monthly expiry up to 36 months + all the 4 next december contracts
Exchange traded Futures or OTC Forwards & options are available for market participants.
The listed Exchanges trade 22 hours a day. The settlements are defined as the average price during a short period (1 to 5 mns).
19
Actors
1 - Physical Players:They are generally producers or work like financial intermediaries. They are trying to optimize the fixing price of a commodities each day, week, month and to take profit from their size.
For oil & Gas: The Majors (Exxon, BP, Shell, Total, ConocoPhilips, Repsol) & the Russians (Gazprom, Lukoil), Hess & MitsuiFor Electricity: RWE, EDF, Eon, Vattenfall, Enel, EndesaFor Metals: Arcelor-Mittal, BHP BilingtonFor Agricultural products: CargillThe Commodity Traders: Glencore, Vitol, Trafigura, Mercuria, Gunvor, Phibro, Sempra
2 - Speculative Traders:They are generally Hedge Funds or Bank traders who are trying to make profit on a short/mid term positions.
3 - Investors:A new trend in commodities market: Commodities Assets are considered as Investments.The Asset Managers are investing some very large slice of their capital to protect the rest of their portfolio against Inflation.
4 - End Users:Industrial Corporations or Airliners face to a risk of commodity prices. They need to forecast prices evolution and to hedge against these risks.
20
Commodities Crisis?
Recession in US: Impact on Global growth and Global commodities demand?
Credit & Subprime crisis: Impact on Financing??
Banks crisis: Impact on Investment??
Euro/Dollar & Equities crisis: Impact on Commodities prices?