Commodity

1
Commodity

• April 21, 2001

2
Varieties of Commodity

• Tangible
• Primary, or slightly processed, material, which
  can be standardized and fungible
• Agriculture
• Metal
• Energy

3
Commodity Trading

• Physical
• Forward privately negotiated, customized
  contracts.
• Futures standardized contracts traded on
  exchanges.
• Options OTC vs Exchange-traded

4
What affects commodity prices?

• Supply
• Demand
• Transport
• Risks

5
Inflation indicator

• Rising cost of commodities will push up
  inflation.
• Rising energy cost has the most direct impacts on
  inflation
• In the time of inflation, commodity prices are
  also driven up by speculators who bet on the
  upward spiralling prices, which in turn further
  fuels inflation.

6
Agricultural Commodity

• Wheat, Corn, Soybeans
• Sugar, Coffee, Cocoa, Orange juice
• Cotton
• Pork Belly
• Lumber
• Palm Oil, Rubber
• Red beans, mung beans, etc.

7
Metal

• Precious Metals Gold, Silver, Platinum
• Base Metals Copper, Aluminum, Zinc, Lead, Nickel
• Minor (or Strategic) Metals Antimony, Bismuth,
  Cadmium, Tungsten, Germanium, Chromium, etc.
• Steel

8
Energy

• Petroleum
• Crude oil
• Petroleum products gasoline, diesel, jet fuel,
  butane, propane, residual fuel
• Natural Gas
• Coal
• Gasohol

9
Hedging (Risk Control)

• Protecting normal business profits from loss
  through adverse price fluctuations.
• Hedging transforms my business from speculative
  business to manufacturing operation, says a
  soybeans crusher.

10
Futures Contract

• A contract covering the purchase and sale of
  physical commodities for future delivery on a
  commodity exchange.
• It requires the seller to deliver to a designated
  location a specified quantity of a commodity to
  the buyer at a stipulated price on some defined
  later date.

11
Commodity Exchanges

• Futures markets function as a form of forward
  pricing rather than substituting for the actual
  purchase or sale of a commodity.
• Only about 2 of all futures contracts result in
  delivery.
• Major exchanges CBT, CME, Nymex, Comex, IPE,
  LME, etc.

12
Leverage

• Only a small amount of money is required to buy
  or sell a futures contract.
• Margin a deposit of good-faith money.
• Margin Call Brokerage firm asks for more
  deposit when the market moves against your
  position.
• Your loss could exceed the amount of money you
  invest.

13
Financial Futures

• Futures contracts written on securities, money,
  currencies, or various stock indices.
• Mostly settled in cash trades in futures are
  settled by entering into the offsetting position.

14
Options

• The right, not the obligation, to buy/sell
  underlying commodity or securities.
• Exchange-traded options.
• Options on stocks
• Options on futures
• OTC options.

15
Commodity Stories

• The fabulously rich Mark Rich, Hunt Brothers,
  Warren Buffet, Arab Sheiks, Sultan of Brunei,
  Robert Kwok
• Ruins Sumitomo, Zhuzhou Zinc
• HK as entrepot -- Gateway to China, one of the
  largest producer and consumer of commodities.