World prices and

international pricing
Lecture 4: Commodities markets pricing
06.04.2024
Commodities – raw materials used to produce other products

Market Major products

Energy Oil and refined products, coal (energy and metallurgical), natural gas
Ferrous metals Metals from the iron group: hot-rolled and cold-rolled products, steel
pipes and metal products, as well as iron ore, ferroalloys and
ferrosilicones
Non-ferrous metals Metals not from the iron group: in a broad sense – including gold,
platinum, iridium, in a narrow sense - aluminum, copper, zinc, lead, nickel,
tin, as well as the corresponding ores
Agricultural Wide array of products such as grains (wheat, corn, soybeans), dairy,
fruits, vegetables, and fibers (cotton).
Machinery and equipment Mostly products of the transport machinery industry, to a greater extent -
the automotive industry (passenger, cargo, road and construction
equipment). In addition to the automotive industry, shipbuilding and
aircraft manufacturing

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Participants in the commodity markets

✓Producers: organizations who mine or grow commodities.

✓Processors: companies that process raw materials into
(semi)finished products.
✓Merchants: intermediaries who buy and sell raw materials.
✓Hedge funds: financial companies that trade in commodity futures
to reduce financial risks.
✓Individual and institutional investors: looking for high returns on
investment in commodities based derivatives due to high market
prices fluctuations.

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Energy commodities

✓Energy prices fluctuate depending on a variety of factors,

including geopolitical tensions, natural disasters, technological
advances and changes in market dynamics.
✓For example, political instability in an oil-rich region could disrupt
production and supply, leading to higher crude oil prices.
✓On the other hand, the development of renewable energy
technologies may reduce the demand for traditional energy
sources, which will potentially lead to lower prices.

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Major market participants, petroleum, USD ‘000, (2022)

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Major market participants, gas, USD ‘000, (2022)

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Major market participants, coal, USD ‘000, (2022)

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Agricultural commodities

✓The prices of these products are significantly influenced by factors

such as weather conditions, pests and diseases, technological
advances and changes in dietary preferences.
✓For example, an unseasonably cold spring can damage wheat
crops, which will lead to a reduction in supply and an increase in
prices.
✓An outbreak of a disease such as avian flu can lead to a reduction
in poultry supplies, which will lead to higher prices.
✓On the other hand, a shift in consumer food preferences towards
plant-based products may reduce the demand for meat, which will
lead to lower prices.
✓Conversely, advances in agricultural technology can increase crop
yields, potentially leading to lower prices.
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Major market participants, wheat, USD ‘000, (2022)

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Metals

✓The prices of these commodities are subject to various influencing

factors, such as the state of the global economy, demand from key
industries, mining problems and geopolitical factors
✓For example, in times of economic uncertainty, investors often turn
to gold as a "safe haven", which can lead to an increase in its price
✓To the contrary, a decrease in demand from such a significant
consumer as the construction industry can lead to a drop in prices
for metals such as steel

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Major market participants, Ferrous, USD ‘000, (2022)

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Major market participants, aluminium, USD ‘000, (2022)

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Factors – natural

Most commodities are extracted or grown, thus relying on natural

factors affecting supply and availability
✓Mineral resources:
▪ uneven distribution due to geological factors
▪ Different conditions required to extract and preprocess commodities
✓Agricultural commodities:
▪ uneven climate conditions determining growth regions
▪ limited land resources
▪ limited water resources
✓General: uneven population vs resources distribution

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Factors – supply and demand

✓On average demand is inelastic on commodities markets.

✓The dynamics of supply and demand play a crucial role in
determining commodity prices. If demand exceeds supply, prices
rise, and if supply exceeds demand, prices fall.
✓This dynamic is influenced by various factors, including weather,
natural disasters, technology, and consumer preferences.
✓For example, adverse weather conditions can damage crops,
leading to supply shortages and price increases. As for demand, if
a new technology reduces the need for a particular product, its
price may fall.

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Factors - geopolitics

✓Geopolitical events such as conflicts, political instability, policy

changes, and trade disputes can affect commodity prices. These
events can disrupt the supply chain, affect demand, or change
market sentiment.
✓For example, conflicts in oil-producing regions can disrupt the
supply level, which will lead to a shortage of supplies and an
increase in prices.
✓On the other hand, trade disputes can lead to a decrease in
demand for certain goods, which will lead to a decrease in their
prices.

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Factors - macroeconomics

✓Economic indicators, including GDP growth, employment and

interest rates, can significantly affect commodity prices.
✓High GDP growth rates can lead to increased demand for
commodities, which will lead to higher prices. Conversely, low
GDP growth rates can cause a drop in demand, which will lead to
lower prices.
✓In addition, the level of employment affects the purchasing power
of consumers. High levels of employment often lead to increased
demand for goods, which can lead to higher commodity prices.
✓Conversely, high unemployment can reduce demand for goods,
leading to lower commodity prices.

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Factors – financial markets

✓Currency fluctuations can also affect commodity prices. In

international markets, the prices of goods in most cases are priced
in US dollars.
✓When the dollar is strong, goods become more expensive for
buyers using other currencies, which can reduce demand and lead
to lower prices.
✓On the contrary, when the dollar weakens, goods become cheaper
for buyers using other currencies. This can increase demand and
lead to higher commodity prices.
✓The level of interest rates plays a significant role, as well as the
difference in interest rate levels in different countries.

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Major market participants, aircraft, USD ‘000, (2022)

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Commodities prices correlation

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The results of fluctuations in commodity prices
Stakeholders Result
Buyers / consumers Direct or indirect impact on living standards
The impact on the value of goods using this
product as a raw material throughout the value
chain
Producers Significant impact on revenue
Significant impact on costs
General economic indicators Inflation
The level of utilization of production facilities
Impact on global demand
Impact on economic growth prospects

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Modern aspects

✓Most commodities are exchange-traded

✓In the early 2000s, there was a wave of mergers and buybacks of
stock exchanges, which transformed exchanges from non-profit
professional enterprises into large corporations.
✓Today, the CME Group and the Intercontinental Exchange (ICE),
two exchanges that manage the energy and agricultural markets,
are owned by institutional investors.
✓In 2012, the London Metal Exchange was acquired by the Hong
Kong Exchange and Clearing for $2.2 billion.

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Financialization of commodities markets

Exchange-traded
derivatives (futures,
options, swaps) were
invented to help supply
chains reduce market
risk through harvesting
and economic cycles,
and have been mainly
used for this purpose
since the 19th century.

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Financialization of commodities markets
The situation changed in
the 1990s, when
investment funds noticed
that commodity prices
were moving
asymmetrically to
financial markets, and
began trading
commodities as
alternative allocation of
resources sourcing
additional income.
Derivatives allow such
trading without physical
ownership thus
eliminating link between
price and real value of
goods.

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Financialization of commodities markets - results

The more commodities become investment assets, the more their

pricing is intertwined with the dynamics of the financial market
and phenomena unrelated to supply and demand.
This is leading to, among other things, to the increasing inverse
correlation between commodity prices and financial markets
indicators and rates.

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See you on 06.04.2024 !!!

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