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Global commodity trading now takes place on a growing platform of modern, transparent commodity exchanges across all time zones. Using agreed frameworks of rules and regulations and standard contract designs we now see a wide range of commodities traded between end users and primary producers. The result is that it is now much easier to buy and sell across the range of basic commodities from orange juice to gold bullion, from crude oil to coffee beans.
Consider that a few commodities like crude oil and coffee have been traded for a very long time in mature markets, but now we see early 21st century markets innovating with different types of futures contracts being introduced. Among these more colourful types of commodity are carbon in the form of emission permits. With the rising anxiety about the serious environmental damage from climate change caused by greenhouse gases, a fast growing market has mushroomed in emissions permits, a form of activity known as carbon trading.
Looking ahead we are likely to see further growth in commodity markets which price environmental externalities, with exiting developments in plastics, emissions and water. Commodity trading activity is basically the buying and selling of futures contracts covering an array of commodities. So you may see commercial end users using commodity futures contracts to protect themselves from sudden price spikes, while the palladium or sugar producer will hedge their future sales and avoid losses on dips in the price.
The main actors in the commodity markets are the speculators who trade futures contracts for profit and their activity brings liquidity, while commodity end users and producers play a smaller role. In essence a futures contract is allows a trader to sell or buy a specified quantity of a particular commodity at an agreed future date, where price is subject to the forces of supply and demand when they contract is made.
Global commodity markets now see traders increasingly active using electronic trading platforms which are open 24 hours as the traditional open outcry on exchange floors falls away in overall terms. We now see the volumes of electronic trading increasing and many exchanges have merged to consolidate their platforms and achieve synergy.
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.
With the opening up of the emerging market economies such as Brazil, Russia, India and China (or BRIC countries), we are likely to see a continuation of the growth in commodity markets in these nations. For example, Dalian Commodity Exchange in China has ambitious plans to develop beyond its current specialism in agricultural commodities, and move to industrial metals and more. While in the Middle East, Dubai is a growing financial centre and the Dubai Gold and Commodities Exchange has an interesting product range including WTI light, sweet crude oil, steel, plastics, gold and silver and the Indian Rupee.
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.
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