Commodity Trading Challenges, Opportunities in Commodity Markets
Worldwide we now see commodity trading activity taking place on a range of modern, regulated commodity exchanges. A broad range of commodities are traded between end user buyers and producer sellers within a framework of standard contract rules and commodity trading regulations. In effect world commodity exchanges make buying and selling of raw commodities ranging from crude oil, copper and wheat to platinum and orange juice much easier.
To add to the established commodity markets that most are familiar with, such as coffee and crude oil, now we are seeing developments and exciting innovation with the introduction of more specialised forms of futures contracts. A notable area where such product development is advancing is in the carbon emission market. Against a background of growing global awareness of the urgent need to abate emissions of greenhouse gases, the market for trading carbon permits is likely to see strong interest and growth going forward.
For the foreseeable future it is likely we will see continual growth of markets which place a price on the environment, with further development in emissions, plastics and perhaps even water. The basis of commodity trading activity is the buying and selling of futures contracts for a whole range of commodities. While the nickel or cocoa producer will use commodity futures contracts to hedge their future sales, commercial end users will also use these contracts for hedging against sudden spikes in prices.
The commodity markets rely on their liquidity from the speculators who are the major players, while commodity end users and primary producers are relatively minor actors who are hedging their operations. What are the key requirements of a futures contract? That it allows a trader to buy or sell a specified amount of a given commodity in the future, at a price fixed when the contract is exchanged and based on the demand and supply at that time.
In recent years the volume of electronic trading has increased significantly as we see various exchanges merging to achieve efficiency and greater synergy. Across the globe, traders are active either on the floor of exchanges, called open outcry, or as is increasingly more likely now, via an electronically traded platform open 24 hours.
The wider availability of real time trading data and online trading software packages means that the opportunities to engage in commodity trading have reached the small retail speculator, who trades smaller amounts and now has virtually global access to the internet. While some traders look to the fundamentals of demand and supply of basic commodities in specific sectors, a growing number prefer to follow the price action of exciting trades, relying on technical analysis irrespective of the commodity in question.
The emerging economies of Brazil, China, India and Russia (or BRIC) continue to expand over the long term and so expansion in regional commodity markets is to be expected going forward. Just look for example at Dalian commodity Exchange in China which has plans to move beyond its core strength of agricultural commodities towards metals and other areas. And look at Dubai in the Gulf, an area with a fast growing financial centre where a wide range of commodities including steel, plastics, WTI light, sweet crude oil, Indian Rupee, silver and gold can be traded on the Dubai Gold and Commodities Exchange.
While the world economy has suffered some serious shocks following the credit crunch and slowing rate of growth, with a number of companies and even some countries getting into serious financial difficulties, commodities as an asset class would appear relatively unimpaired. Despite the short term difficulties, the global economy will continue to rely on key commodities such as crude oil, steel and copper, as well as basic softs like sugar, cotton and coffee, not to mention grains such as wheat, corn and rice. For this reason we can expect commodity markets to see through these problems and for commodity trading as an activity to continue to be at the centre of world trade and finance. - 23204
To add to the established commodity markets that most are familiar with, such as coffee and crude oil, now we are seeing developments and exciting innovation with the introduction of more specialised forms of futures contracts. A notable area where such product development is advancing is in the carbon emission market. Against a background of growing global awareness of the urgent need to abate emissions of greenhouse gases, the market for trading carbon permits is likely to see strong interest and growth going forward.
For the foreseeable future it is likely we will see continual growth of markets which place a price on the environment, with further development in emissions, plastics and perhaps even water. The basis of commodity trading activity is the buying and selling of futures contracts for a whole range of commodities. While the nickel or cocoa producer will use commodity futures contracts to hedge their future sales, commercial end users will also use these contracts for hedging against sudden spikes in prices.
The commodity markets rely on their liquidity from the speculators who are the major players, while commodity end users and primary producers are relatively minor actors who are hedging their operations. What are the key requirements of a futures contract? That it allows a trader to buy or sell a specified amount of a given commodity in the future, at a price fixed when the contract is exchanged and based on the demand and supply at that time.
In recent years the volume of electronic trading has increased significantly as we see various exchanges merging to achieve efficiency and greater synergy. Across the globe, traders are active either on the floor of exchanges, called open outcry, or as is increasingly more likely now, via an electronically traded platform open 24 hours.
The wider availability of real time trading data and online trading software packages means that the opportunities to engage in commodity trading have reached the small retail speculator, who trades smaller amounts and now has virtually global access to the internet. While some traders look to the fundamentals of demand and supply of basic commodities in specific sectors, a growing number prefer to follow the price action of exciting trades, relying on technical analysis irrespective of the commodity in question.
The emerging economies of Brazil, China, India and Russia (or BRIC) continue to expand over the long term and so expansion in regional commodity markets is to be expected going forward. Just look for example at Dalian commodity Exchange in China which has plans to move beyond its core strength of agricultural commodities towards metals and other areas. And look at Dubai in the Gulf, an area with a fast growing financial centre where a wide range of commodities including steel, plastics, WTI light, sweet crude oil, Indian Rupee, silver and gold can be traded on the Dubai Gold and Commodities Exchange.
While the world economy has suffered some serious shocks following the credit crunch and slowing rate of growth, with a number of companies and even some countries getting into serious financial difficulties, commodities as an asset class would appear relatively unimpaired. Despite the short term difficulties, the global economy will continue to rely on key commodities such as crude oil, steel and copper, as well as basic softs like sugar, cotton and coffee, not to mention grains such as wheat, corn and rice. For this reason we can expect commodity markets to see through these problems and for commodity trading as an activity to continue to be at the centre of world trade and finance. - 23204
About the Author:
The writer,William Davies, travels the globe, follows the markets and contributes to Commodity Trading Today, an informational and educational resource covering commodities markets. You can get free Commodity Trading Alerts and articles from the Commodity Universe Newsletter here.
posted by X - Men @ 12:29 AM
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