What Are International Commodity Markets?
Commodity trading has been on the rise in the past few years and is a popular alternative investment as well as a trading option.
The commodity market facilitates the trade of oil, gas, metals, bullion, agricultural commodities, etc. In addition, you can trade in international commodities via derivatives on global commodity exchanges.
This blog will discuss what international commodity markets are, how they function, and the various global commodity exchanges worldwide.
What Are International Commodity Markets?
An international marketplace where investors can buy and sell commodities on global commodity exchanges. These commodities are further split into two groups: hard commodities and soft commodities.
Types of Commodity Markets
Commodity trading can involve either immediate delivery or delivery in the future. While the former takes place in spot markets and later involves the derivatives market. These are described as follows:
- Spot Markets: These are physical markets where traders exchange commodities. Also, the trades are made in cash, and delivery is immediate. Factors such as supply and demand determine the prices here.
- Derivatives Markets: The derivatives markets use the spot markets as underlying assets. With futures contracts, the transactions are done at a specified future date and set price. The physical delivery of commodities rarely takes place in this case. Several traders prefer derivatives since it facilitates only profit and loss rather than dealing with physical goods.
How Do International Commodity Markets Function?
International commodity exchanges allow investors to trade in commodities globally to earn profits. This can be done via commodity derivatives to hedge from or speculate on future prices. Investors can also profit from the commodity market by purchasing stock in companies that deal in these commodities. Speculators, investors, traders and arbitrageurs are actively involved in the commodity markets.
Commodity derivatives enable traders to buy or sell the underlying assets at a fixed future date and price. Upon the expiry of the contract, the investor can either receive the underlying assets as a physical delivery or roll over to close the contract.
As the price of traded commodities changes, corresponding futures also change. The prices depend on supply and demand and complex factors like government policies, geopolitical events and the state of the economy.
Specific commodities such as gold help in hedging against inflation and portfolio diversification. In addition, the prices of commodities are negatively correlated to stocks, making some investors rely on commodities during periods of market volatility.
Also Read: 5 Reasons to Trade in Commodities
How to Trade in International Commodity Markets
There are numerous ways by which you can trade in international commodity markets. They are mentioned in the following list:
- Direct Investment: Commodities such as gold and silver can be purchased physically. However, this comes with high costs and storage issues and is considered a good option only for high-value commodities.
- Futures Contracts: Future contracts are a popular method in commodity trading. It is a contract between two parties to trade the underlying commodity at a fixed price and date in the future. A brokerage account is needed for trading in futures contracts.
List of Global Commodity Markets
Let us discuss some of the major global commodity exchanges below.
- Chicago Mercantile Exchange (CME)
The Chicago Mercantile Exchange (CME) is an American commodity derivative exchange based in Chicago.
The CME Group has various subsidiaries such as CME, CBOT, NYMEX and COMEX. Most contracts on CME are futures and options.
Trading in the CME has multiple perks, such as high liquidity, efficient transactions, various products, financial safeguard, transparent and anonymous marketplace, among many others.
- London Metal Exchange (LME)
The London Metal Exchange (LME) is the world’s largest futures exchange for base metals and other precious metals. The various metals it offers for contracts are aluminium, aluminium alloy, NASAAC (North American Special Aluminium Alloy), nickel, tin, zinc, cobalt, lead, copper, molybdenum and steel millet.
Futures are offered in daily, weekly or monthly forms. Daily contracts have expiry dates up to 3 months from the purchase date. Weekly contracts have expiry dates of up to 6 months, and monthly contracts have expiry dates of up to 123 months. Cash contracts on the London Metal Exchange can be settled or delivered two business days forward from the trading day.
- Intercontinental Exchange (ICE)
Intercontinental Exchange is an American company that operates a network of exchanges and clearing houses worldwide. There are six central clearinghouses in ICE that are listed below.
- ICE Clear U.S.
- ICE Clear Canada
- ICE Clear Netherlands
- ICE Clear Europe
- ICE Clear Credit
- ICE Clear Singapore
The ICE offers high efficiency, price transparency, high liquidity and low costs.
- Tokyo Commodity Exchange (TOCOM)
Tokyo Commodity Exchange (TOCOM) is a commodity exchange based in Japan. It is part of the Japan Exchange Group. It is the country’s largest commodity exchange and one of Asia’s most prominent commodity exchanges.
This exchange mainly trades in metals, rubber, oil and soft commodities. In addition, it also offers futures and options for precious metals such as gold, platinum, silver, etc. and energy resources such as crude oil, gasoline, gas oil, etc.
Apart from the exchanges mentioned above, Dubai Mercantile Exchange (DUMX), European Energy Exchange (XEEE), U.S. Futures Exchange (USFE) and Chicago Board of Trade (XCBT) are other reputed commodity exchanges.
Investing in the international commodity market comes with various advantages. However, before investing, you must be well-versed in the market trends, risks and other associated factors. This, in turn, will help you make informed decisions regarding your investments in the international commodity markets.
Frequently Asked Questions
How can I track the performance of commodities?
You can track commodities’ performance daily on commodity exchanges’ official websites. The prices are also updated on various online financial portals.
Are commodities a wise investment choice?
Similar to any investment, commodities come with certain benefits. For example, it adds diversification to your portfolio and helps to hedge against inflation. However, commodity investments come with some risks.
Prices of commodities are very volatile and tracking them can be very complex. You should thoroughly understand the factors that move commodity prices before investing in them.