The economy of every nation depends on one commodity or the other. This is why commodities play a crucial role in the growth of the global economy. There are hard commodities that have to be mined or extracted, such as oil, natural gas and metals like gold, copper, platinum and such like. Soft commodities are mainly agricultural products, such as wheat, corn, coffee and livestock.
The world of commodities is a very interesting one. Here’s a look at some amazing facts about commodities.
The very first time that oil was produced in the world was in China in 327 AD. Bamboo pipelines were used by Chinese engineers to drill 240-metres to extract oil. In those days, oil was called “burning water” and was used to evaporate brine and make salt.
According to OPEC data and the United States Energy Information Administration, members of the OPEC generate over 45% of the world’s crude oil and house around 81% of the world’s fully recognised crude oil reserves.
The price of oil is mainly dependent on the laws of demand and supply. And, demand has been dependent on global economic performance, with prices generally rising in times of economic boom due to higher demand for oil, needed for production and transportation. Oil prices fall during economic slowdown.
On the supply side, OPEC has a great influence over the prices, but this has declined with the rise of the US as a shale producer, which is not an OPEC member. Political turmoil in the oil producing region also affects the supply and prices of oil.
The world’s first futures exchange, the Egg and Butter Board, was established in 1848, as a subsidiary of the Chicago Produce Exchange. It was restructured as the Chicago Mercantile Exchange in 1919 and was dominated primarily by agricultural commodities, until the creation of bond futures contracts in the 1970s.
An upwardly mobile market is said to be bullish because a bull raises it head and horns to attack. On the other hand, a bear swings its arms and claws to attack, making a bearish movement a downward one. Chicago’s sports teams reflect these trading symbols quite accurately, with the Chicago Cubs being the baseball team, Chicago Bulls being the basketball team and Chicago Bears being the American football team.
Copper was the first metal used by human beings and archaeological evidence suggests that it was first used during the prehistoric age, around 11,000 years ago. The oldest known copper artifact used by humans dates back to 8700 BC and was found in northern Iraq, home to one of the most ancient civilisations in the world, the Mesopotamia Civilisation.
Over one third of the world’s copper production comes from Latin American countries. According to the United States Geological Survey, Chile produces 5.5 million tonnes and Peru produces 2.3 million tonnes of copper. China and the US are next in the list of top producers, with 1.74 million tonnes and 1.41 million tonnes, respectively.
Copper is a very good conductor of both heat and electricity and is even corrosion and weather resistant. It is one of the main components in the manufacture of electrical wires, machinery, pipes and such like. It is also a key component of alloys like brass and bronze. The price of copper depends mainly on the economic output. Supply is affected by infrastructure issues, trade disputes, seasons, especially for major producers such as Chile and Peru.
China is the leading producer of gold in the world, followed by Australia, Russia and the United States. Gold is a precious metal, used primarily for jewellery production and as an instrument of investment. It is also used in the medical and mechanical industries, since it is a good conductor of electricity and is resistant to chemical reactions. It is considered as a stable investment, as it has a stable value or its value increases during times of economic slowdown and political crisis. Gold price has an inverse relationship with the value of the US dollar, so traders tend to invest in gold when the value of the dollar declines.
Commodities may show the real impact of the Trump-China Trade War. The impact of an increase in tariffs by the US on Chinese products can be seen on the commodities market. Copper futures on the London Metal Exchange have been trading at lower prices since the changes in tariff were announced, with a drop of around 16% from the peak prices of June 2018. China’s iron ore imports also decreased by around 1.6% in the first six months of 2018, in comparison to 2017. Steel prices have remained strong, with China witnessing an increase in its steel PMI.
South Africa produces around 120,000 kgs of platinum annually and extracts 75% of the world’s platinum. The nation has the highest reserves of platinum group metals (PGM). Platinum provides extreme resistance to corrosion and is a good catalyst for the refining of oil and for other laboratory applications. It is also used in dental alloys, electronic devices, glass, biomedical applications and turbine blades.
Coffee is the primary source of caffeine in the world and is the second most traded commodity, after crude oil. The coffee market is worth over $100 billion worldwide. Coffee futures contracts involve two varieties of coffee beans: Arabica and Robusta. Arabica is considered more premium because it has around 50% more caffeine content than Arabica. Two-thirds of the world’s coffee is grown in North and South America, 90% of which is in developing countries. Brazil, Vietnam and Colombia are the three top producers of coffee.
Liquidity is the most crucial factor for commodity traders. The higher the volume of contracts available, the easier it becomes to buy and sell with narrow spreads and less slippage. Gold and crude oil always attract a large number of investors, while timber and frozen fruits futures contracts suffer from liquidity issues. Supply and demand are the main factors affecting the liquidity of a commodity.
A majority of soybean is grown in the US, followed by Brazil, Argentina, China and India. Its prices are affected by demand for biodiesel, animal feed and meat and dairy substitutes, such as soy milk. Weather conditions can also affect prices. Since the US is a major producer, the strength of the USD also affects the prices of soybean. Speculation about the Chinese tariffs on US soybean have had an impact on prices.
The commodities markets can be highly volatile, creating opportunities for traders to take long or short positions. However, make sure you base your trading decision on solid analysis.