Global Commodities: Physical, Financial, and Sustainability Aspects

By Murad Harasheh

For many academics, students, and professionals, the field of commodities is a black box. This book explores commodities in a holistic manner, presenting concepts from a multidisciplinary business and financial perspective, and offering a panoramic view of the global commodity business and markets. In this book, the author presents core issues related to global commodities with recent data including COVID-19. The book introduces the key physical commodities traded globally and some related issues such as the global supply chain, global trading, transportation, storage, and how to finance global commodity trades. Then, it discusses how global commodity businesses and traders manage global risks related to commodity production (generation or extraction), transportation, storage, the final delivery, and currency exchange. Additionally, the book discusses financial commodities, the origins of global commodity derivatives and exchanges, the rationale behind the birth of commodity futures and trading, hedging, speculation, financialization, and manipulation of commodity markets, and how financial trading is executed in real life. In the last section, the author also discusses sustainability issues related to global commodities and the financial valuation aspects of the global commodity businesses supported by examples from real cases with recent data.

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Feb 4, 2021
• ISBN: 9783030640262

Book preview

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021

M. HarashehGlobal Commoditieshttps://doi.org/10.1007/978-3-030-64026-2_1

1. Overview of the Global Physical Commodities

Murad Harasheh¹  

(1)

University of Bologna, Bologna, Italy

Murad Harasheh

Email: [e-mail]

Abstract

In the first chapter, I present an overview of the physical commodities traded globally, the various categories and commodities within agricultural, metal, and energy commodities. The importance of global commodities. A little history about the birth of global commodities exchanges. And updated historical prices and quantities, the behavior of the prices of different commodities to shocks, crises, and emergencies such as COVID-19.

Keywords

CommoditiesEnergy commoditiesMetallic commoditiesAgricultural commoditiesPrice drivers

What is a Commodity

Commodities are naturally extracted materials that can be traded in bulks, oil, steel, and grain are examples of commodities. They can be considered basic products used as production inputs for producing other goods or they can be directly consumed such as agricultural commodities.

Commodities form the basic input that is converted into the food we eat, the industrial goods we use, and the energy that fuels our transport and heats and lights our lives and is one of the oldest forms of economic activity.¹

For many of us, we take things around as guaranteed by nature, but we ignore the hidden complicated story behind it. Starting from our food, our clothes, the different forms of energy, and in every single object around us there is a big story related to global commodities. Even though global commodities enter every single detail of our lives, yet it is one of the most ignored or misunderstood disciplines.

Physical commodities are the heart of the real economy. They are traded globally in massive quantities. We depend on them for the basics of everyday life. Commodities must also meet specified minimum standards, also known as a commodity grade.

Why Commodities are Important

Various aspects that make global commodities important at different levels, as I have previously mentioned, commodities form the daily life of everybody, therefore, it is essential to show how commodities are important at different levels:

1.

Social aspect: some commodities have the characteristics of a public good, this means that they must arrive to every resident regardless of the economic or social situations, thus, a certain level of government intervention is needed to guarantee the commodity supply. For example, national regulatory authorities and local authorities work together to guarantee the supply of electricity and gas to their residents.

2.

Political aspect: even though operating in the global commodity business is considered a free market activity (means liberal market), yet certain national aspects of global commodities are centrally decided at the political level. For example, the decision of the quantities of exports and imports for certain commodities are set by law, many countries around the world including Europe and the United States set fixed quotas for importing and exporting agricultural commodities to protect local farmers. The limits of greenhouse gas (GHG) emissions are also centrally decided and have to be respected by the market players which influence the activity in the global commodities. The European Green Deal that was approved in January 2020 regarding the EU sustainability strategy to be achieved by 2050 is a good example.

3.

Environmental and public health aspects: every step in the supply chain of the commodities implies environmental and health issues; from the production to the transportation and then to the consumption of the commodity, there is a degree of pollution. For example, imagine the pollution produced in the exploitation of oil fields both onshore and offshore. Then in the huge shipment of oil in the sea, and finally, in the treatment and the final consumption of oil for electricity generation. As we well discuss later, the energy sector contributes to the majority of carbon dioxide (CO2)—around 70%—emitted in the atmosphere. Therefore, commodity companies (especially energies) have to comply with new guidelines for the sustainability transition adopted by the Paris Climate Agreement (COP21) in 2015 and its subsequent climate summits.

4.

Economic aspect: commodity buyers, sellers, and traders usually engage in huge transactions for buying or selling commodities globally in which sometimes the value of one transaction exceeds the value of the business itself as in the case of commodity traders. Global commodity transactions can also be considered leverage for the global economy because they involve other vital economic sectors such as global shipping companies, storage facilities, and insurance companies. Therefore, global commodity business contributes significantly to global real economics production, economic growth, and employment.

5.

Law & regulatory aspect: before the wave of privatization and the market liberalization in the early 1990s, one company was controlling² the whole supply chain from production to transportation and storage, to the final distribution, then after the liberalization, national regulatory authorities obliged companies for the separation of managerial and ownership in each business in the supply chain. Global commodity companies are usually giant Multinational Corporations (MNCs), therefore, an efficient level of regulation is always needed to keep them operating within the rules of the game without creating market distortion. For example, Anti-Trust Authorities worldwide keep watching the activities of big commodity companies to prevent increased market share and any market abusive behavior. Other aspects of regulations include efficient laws to guarantee the security of supply of the commodity at the national level, and regulations of the sustainability transition without hindering economic growth.

6.

Storageand storability aspect: almost all commodities can be stored even for a long time, and commoditystorage is a vital mechanism against sudden market shocks, a sudden shock in the supply for grain due to atmospheric hazards can be absorbed by the efficient release from the storage which prevents price hikes. The situations where there is excess supply, storage plays an important role in containing the excess supply and prevents price collapse. However, some commodities are not storable such as electricity (until we invest the intelligent commercial battery that stores electricity for a long time), in this case, the Transmission System Operator (TSO) and the national regulatory authority play crucial roles in the real-time balancing of the electricity grid to prevent power outages.

Key Characteristics of Commodities

Unlike other finished products in the market, commodities enjoy some characteristics that make them suitable for global trading.

1.

Globalization aspect: they form a global need for all countries around the globe since they are essential for the production cycle and personal needs. They are transported by land, air, and sea using large shipments.

2.

Large delivery and cost: commodities are transported in large quantities depending on huge fixed costs, the greater the amount transported, the lower is the average cost per unit (the economies of scale), for example, crude oil tankers are huge carriers that require very large fixed operating costs, therefore, using it to the maximum capacity for shipping crude oil would reduce the average cost per barrel. That’s why the cost of transportation makes the destination a significant pricing factor.

3.

Commodities with similar physical characteristics are exchangeable: commodities can be very similar but not the same in terms of quality characteristics, for example, two of the global oil benchmarks Brent oil and Dubai oil are not the same in terms of viscosity and sulfur contents but they can be exchangeable to meet some demand needs. In other cases, melting copper to create concentrates may influence price and quality due to the transformation.

4.

No branded goods: unlike other products, commodities are basic and essential products extracted from nature, so there is no one paying extra for the brand name, consequently, price is determined by product quality and availability.³

5.

Storage: commodities can be stored for long periods, as we have mentioned earlier, commoditystorage plays an important role in smoothing consumptions between the present and the future, and a shock-absorbing mechanism.

6.

Inelastic goods: since commodities are vital for our daily life, and they feed the economic growth, the demand for commodities is somehow inelastic, which means we need them at any cost.

Categories of Physical Commodities Traded Globally

If we look around us, we notice that everything we use or consume comes from commodities, either a primary commodity such as grains or natural gas or a derived one such as gasoline. All of the following categories of commodities are traded on global exchanges worldwide in a continuous mode with real-time prices that can be controlled at any time and from anywhere.

Energy commodities: they have always been a vibrant driver for production, consumption, and economic growth. Crude oil, natural gas, coal, uranium, electricity, and ethanol as primary energy commodities, and gasoline as a secondary commodity.

Metal commodities: they are one of the oldest human activities served as an engine for human and economic development. Precious metals such as gold, silver, platinum, and palladium; base metals such as steel, aluminum, copper, lead, nickel, tin, and zinc are examples of metal commodities.

Agricultural commodities: they for the basic substance for the food we eat. They include commodities extracted from the land such as corn, soybean, wheat, rice, cocoa, coffee, cotton, and sugar, and livestock commodities such as lean hogs, pork bellies, live cattle, and feeder cattle.

Commodities can be classified as

Primary commodities: which are extracted directly from nature, such as crude oil and grains.

Secondary commodities: which are produced or derived from the primary commodity to meet certain market needs, such as gasoline from oil, and concentrates of smelted metals.

They can also be classified as

Hard commodities: such as crude oil, gold, and silver.

Soft commodities: such as agriculture products, corn, wheat, and coffee.

In the next section, I show the details of each category of commodities.

Metal Commodities

Metallurgy, as one of the oldest human activities, goes back to the bronze age around 3000 B.C. An ancient civilization is considered in the Bronze Age either by producing or smelting different metals. Bronze has durable characteristics compared to other metals, allowing Bronze Age civilizations to gain a technological advantage. Then Trading metals originated with the Phoenicians around 1500 B.C in the Levant region of the Middle East and continued with the Romans.

However, modern metal trading can be traced back to the mid-nineteenth century in Great Britain to feed the British industrialization. British companies started to demand massive amounts of copper to feed British high growth rates. They started to stipulate forward contracts of copper from Chile with 3-month delivery (the time needed to transport the copper from Chile to Britain), this, was the first initiative to create London Metal Exchange established in 1877, which is now the most important metal exchange in the world. In this context, history is important in explaining why certain places are the core avenue for global trading in certain commodities.

Traditionally, until the end of the twentieth century, metal trading had been directed from east to west or from south to north. However, the rapid growth in Chinese demand in the late twentieth century and early twenty-first century has changed the global structure of metals and minerals trading. The remarkable industrial growth of China in the twenty-first century transformed the trade in minerals and metals. Rapid growth in Chinese demand created supply pressures, enhanced the development of new sources of production and trade routes, shifted the direction of imports to the east and the BRICS, and led to unprecedented market volatility. China’s share of metal imports rose from less than 10% in 2002 to 46% in 2014. For the same period, China has an exponential growth in the monetary value of metal commodities imports, they jumped from $2.77 billion to $88.4 billion making 33.45% annual geometric growth. The main partners of China’s metal imports are Australia, Chile, Brazil, Peru, and Canada. More Chinese smelting capacity has been built to meet the demand for metal concentrates especially copper.⁴

Due to weight and transportation issues, the initial treatment for most metal commodities is performed in the mine area. Metals such as copper, lead, nickel, and zinc ores are transformed into concentrates to increase the quality, while bauxite is turned into alumina. The basic mined metals and their concentrates are treated as primary commodities, whereas refined metals can sometimes be considered secondary commodities after refinement occurs at the smelters.

Figure 1.1 demonstrates the main metal commodities traded around the globe. It shows the annual production in 2019—here we refer to the metal production (the secondary commodity rather than mine production), crude steel captures most of all traded metals. Precious metals (mine production) are also important in the global metal commodity business, as of 2019, 3300 and 27000 metric tons of gold and silver produced, respectively, China alone produced almost 10% of the world’s gold and around 6.2 million ounces of platinum.

../images/507577_1_En_1_Chapter/507577_1_En_1_Fig1_HTML.png

Fig. 1.1

Metal commodity production (Data source [Thrurtell et al. 2020]—CC-BY-4.0)

Table 1.1 shows the trend in the last two years for the prices of main metal commodities. We can notice that the prices of the basic metals and minerals are declining in early 2020 due to the COVID-19 pandemic that forced a complete lockdown in the major industrial cities around the world resulting in a significant drop in the demand.

Table 1.1

Prices of main metal commodities