Materials Risk explains: How El Niño affects commodity prices

A deadly mudslide that killed hundreds of people in Colombia earlier this month may portend the spread of more extreme weather conditions. Local weather forecasters have blamed the wet weather that has hit the region on the weather phenomenon known as El Niño.

First observed in the 19th century by Peruvian fishermen, the recurring weather phenomenon is known to affect Australasia as well South America. Its climatic effects can reach as far as West Africa triggering downpours or droughts. Previous episodes have had a significant impact on crop yields and the price of agricultural commodities as well as metal and energy prices. read more

What the new order in commodity trading means for buyers

Developments in commodity trading have the potential to spark market disruptions and higher commodity price volatility according to a report from Oliver Wyman. The report “The Dawn of a New Order in Commodity Trading – Act III” highlights the risk that changes in the commodity trading environment could have for both producers and consumers of commodities as well as an opportunity for investors.

Virtually all agricultural, energy, and industrial commodities must undergo a variety of processes to transform them into things that we can actually consume. These transformations can generally be grouped into the following categories; space, time and form. Firms that are involved in commodity trading attempt to identify the most valuable of these transformations, undertake the transactions necessary to make these transformations and engage in the physical and operational actions necessary to carry them out. read more

Geopolitics and oil price volatility

Materials Risk has discussed the decline in commodity price volatility (and in oil prices in particular) a number of times over the past couple years. Macro factors such as monetary easing have helped with lower interest rates increasing the incentive to store commodities which, in turn increases the shock absorbing effect on prices. The oil market has been particularly interesting since despite the plethora of geopolitical concerns and significant supply outages oil prices have traded in a narrow range. A new chart from Bank of America Merrill Lynch shows that despite the interruptions to supply overall volatility in oil production growth has fallen to historic lows, suggesting that this may have been the main micro factor in dampening oil price volatility. read more

Is food price volatility about to return with a vengeance?

Food manufacturers have got used to low food price volatility during 2013. That all changed in the first few months of 2014 as adverse weather, disease and geopolitical concerns has affected the outlook for food production from Brazil to Ukraine. Is food price volatility about to return with a vengeance?

To recap agricultural prices have risen sharply since the start of 2014. First, the weather. Drought in Brazil has raised fears that crop yields for coffee, sugar and soybean farmers will be severely reduced, while drought in West Africa has reduced the output of cocoa. Second, disease. The coffee leaf rust disease has affected output of coffee in Central America while the Porcine Epidemic Diarrhoea virus has decimated large amounts of pigs in the US. Finally, geopolitical concerns have returned. The on-going tension between Ukraine and Russia has heightened concerns that wheat and corn exports from the region will be affected. read more

Jump in the BDI unlikely to herald rebound in commodity prices

Forbes magazine notes that the 65% rise in the Baltic Dry Index (a measure of the cost of shipping coal, iron ore and other dry cargoes) since the start of the year could be a sign that commodity prices are due a turnaround. They note the following as the reason for the rise.

The prime reason for the increase in the cost of renting a ton bulk carrier of the sort that plies the route between Brazil and China, or Australia and Japan, is that forward orders for iron ore and coal have risen after a depressing start to 2013. Secondary reasons for the rise are that the five tough years after 2008 saw several ship owners collapse, and with those failures came a sharp decline in orders for new ships which means a shortage of bulk carriers could emerge in the next few years. read more

Q&A: Oil pricing investigation

And You Might See Me Tonight With an Illegal Smile Thomas Hawk / / CC BY-NC

Petrol price ‘rigged for a decade’ said the headline in the Telegraph. According to the paper UK motorists may have paid thousands of pounds too much for their petrol (gasoline) over the last decade, after two of Britain’s biggest companies were raided on suspicion of manipulating oil prices.

Why are we talking about this now? Petrol prices never seem to go down when oil prices fall, there must be something dodgy going on.

On Tuesday (14th May) the European Commission admitted that it carried out surprise raids on the offices of Shell, BP, Platts and Statoil as part of an investigation into the oil majors over allegations of anti-competitive agreements, which led to oil price manipulation. read more