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IFSL RESEARCH

In partnership with:

COMMODITIES TRADING
2008
JUNE 2008 WWW.IFSL.ORG.UK
The trading of commodities consists of direct physical trading and
derivatives trading. This new edition of IFSL Commodities Trading report
predominantly focuses on commodity derivatives that are traded on
exchanges and OTC derivatives markets. In placing reliance on other
organisations’ statistics, we cannot guarantee a total distinction between
physical and derivatives trading statistics.
OVERVIEW

The commodities markets have seen an upturn in the volume of trading in


recent years. In the five years up to 2007, the value of global physical exports
of commodities increased by 17% while the notional value outstanding of
Chart 1 Commodities trading

commodity OTC derivatives increased more than 500% and commodity


% change between 2003 and 2007

derivative trading on exchanges more than 200% (Chart 1). London is one of
600

the main global centres for commodities derivatives trading along with New
York and Chicago. While Chicago is predominantly a domestic market,
500

London and New York source a large volume of international business.


400

Prices of many commodities such as oil, nickel, tin, corn and wheat have
300

reached record highs in early 2008 (Chart 2). Commodity exporting countries
have benefited from this trend due to rapidly growing export revenue.
200

Investments in the commodities sector have also accelerated, with between


100

$150 and $200bn invested in commodities indices in 2007. Citigroup


estimates that total funds invested in commodity markets through indices,
0
OTC commodity Commodity Commodity

hedge funds, exchange traded funds and short-term momentum players


derivatives1 exchange trading2 exports

reached $400bn at the end of the first quarter of 2008, up from $330bn at the
1
Notional value outstanding; 2 Number of contracts traded
Source: World Trade Organisation; Bank for International

end of 2007.
Settlements; IFSL estimates

OTC derivatives trading The notional value outstanding of banks’ OTC


commodities’ derivatives contracts increased 27% in 2007 to $9.0 trillion.
OTC trading accounts for the majority of trading in gold and silver. Overall,
precious metals accounted for 8% of OTC commodities derivatives trading
in 2007, down from their 55% share a decade earlier as trading in energy
Chart 2 Commodities, Stocks and Bonds

derivatives rose. London is by far the largest global centre for OTC
transactions in precious metals, followed by New York and Zurich.
Index, 1997=100
250

Exchange-traded commodities Global physical and derivative trading of


Goldman Sachs
Commodity Index

commodities on exchanges increased more than a third in 2007 to reach 1,684


million contracts. Agricultural contracts trading grew by 32% in 2007,
200

energy 29% and industrial metals by 30%. Precious metals trading grew by
Lehman Brothers

3%, with higher volume in New York being partially offset by declining
Aggreg. Bond
150 Index

volume in Tokyo. Over 40% of commodities trading on exchanges was


conducted on US exchanges and a quarter in China. Trading on exchanges in
S&P 500

China and India has gained in importance in recent years due to their
100

emergence as signficant commodities consumers and producers.


London as a centre for commodities trading Major derivatives exchanges
50
1997 1999 2001 2003 2005 2007
1998 2000 2002 2004 2006

located in London accounted for 17% of global trade in commodities in 2007: Source: GSCI, Lehman Brothers, S&P

Euronext.liffe, Europe’s biggest exchange for ‘soft commodities’; London


Metal Exchange, the leading global exchange for non-ferrous metals; and
1
IFSL Commodities Trading - June 2008

ICE Futures, Europe’s biggest exchange for energy products. Most


of OTC trading in precious metals is conducted in London through
Table 1 Physical Commodity Breakdown
the London Bullion Market association. Grains Meats Industrial Precious Food & Energy

The UK is also home to a number of international commodity


Corn Cattle metals metals Fiber Crude oil
Soybeans Hogs Aluminium Gold Cocoa Heating oil

organisations such as the International Coffee Organisation,


Wheat Copper Platinum Coffee Natural gas

International Cocoa Organisation and International Sugar


Oats Lead Silver Cotton Unleaded gas

Organisation. London as the leading international financial centre


Soy meal Nickel Lumber
Soybean oil Palladium Orange juice

benefits from being the preferred location for many international


Rice Zinc Rubber

firms trading in commodities as well as investment banks and other


Sugar

financial institutions that trade in commodities derivatives.

COMMODITIES MARKETS
Chart 3 Gold and silver market turnover
Trading of commodities consists of direct physical trading and derivatives
trading. Commodities include a range of diverse products as shown in
millions of ounces, annual turnover1

Table 1. More recently there has been growing sophistication of commodities


Silver Gold

investments with the introduction of new “exotic” products such as weather


1999

derivatives, telecommunications bandwidth, gas and power derivatives and


2000

environmental emissions trading. Other products that are traded on


2001

commodity markets also include foreign currencies and financial instruments


OTC market
Exchange trading 2002

and indexes. These are the focus of separate IFSL reports. Commodities 2003

trading is conducted on OTC markets and exchanges, and consists of spot


trading, physical forwards and derivatives.
2004

2005

OTC commodities markets 2006

Physical trading OTC transactions take place directly between principals


200,000 100,000 0 0 12,500 25,000
1
OTC data is three times LBMA turnover, exchange data is

and therefore have a high degree of flexibility in their transactions. They are
TOCOM and COMEX trading

essentially wholesale markets in which individually-tailored contracts are


Source: IFSL estimates and forecast for 2006 based on TOCOM,
COMEX, The Silver Institute, LBMA and GFMS Ltd data

traded. The most popular physical commodities contracts can be broken


down into: metals, energy, grains and soy, livestock, food and fibre and
exotic commodities. A very large proportion of OTC commodities’ trading is
transacted between producers, refiners and wholesalers of commodities on
the spot market. Trading is delivery based and typically done through brokers
and other intermediaries. For most commodities that are physically traded
there is no market in a central meeting place and where it exists it typically
handles only a small part of the total trade.
EXCHANGE TRADING OTC TRADING
(standardised contract size and (individually tailored contracts)
maturity dates)

Physical trading accounts for a small Accounts for most of OTC trading.
proportion of trading on exchanges. It Participants include farmers, refiners,
Physical
is typically used to balance out an wholesalers. Trading is done on the
trading
excess of demand or supply on the spot and forwards market and is
physical market. delivery based.
(Not a focus of this report) (Not a focus of this report.)

Derivatives trading accounts for most Precious metals and more recently
of trading on exchanges. Traders energy contracts are often traded
Derivatives
include hedgers, speculators and through OTC derivatives markets.
trading
arbitragers. Dominates soft (see Charts 3, 4 and 8)
commodities’ trading.
(see Charts 5 to 7, Tables 2 and 3)

2
IFSL Commodities Trading - June 2008

OTC trading accounts for the majority of trading in gold and silver (Chart 3).
Six times as much gold and three times as much silver was traded on OTC
Chart 4 OTC derivatives trading of

markets than on exchanges in 2006. London is by far the largest global


commodities

centre for OTC transactions in precious metals as much of the physical trade
Notional value outstanding, US dollars billions, end-year1

is conducted there. Other important centres include New York, Zurich and
9,000

Tokyo.
8,000

7,000

Derivatives trading OTC derivatives trading has gained in importance in


6,000

recent years. In some products such as gold and silver and more recently 5,000

energy products, derivatives trading on the OTC market has expanded faster 92%

than trading on exchanges. The notional value outstanding of banks’


4,000

commodities’ OTC derivatives contracts (based on the BIS interpretation of


3,000

commodity derivatives) increased 27% in 2007 to $9.0 trillion. This was up


2,000 Other

from $0.4 trillion at the end of 1998 (Chart 4). Commodities’ share of
1,000 Other precious met.
45% 1%
12% commodities

the overall notional value outstanding of OTC derivatives grew from 0.5% to
Gold 8%
0 43%
1998 2000 2002 2004 2006

1.5% during the past decade. The vast majority of OTC derivatives trading is
1999 2001 2003 2005 2007

in interest rate contracts and foreign exchange contracts. Overall, gold and
1
Based on the BIS interpretation of commodity derivatives
Source: Bank for International Settlements

other precious metals accounted for 8% of OTC commodities derivatives


trading in 2007 down from their 55% share a decade earlier. Chart 5 Exchange-traded commodity
trading
The large increase in trading over the last few years was due to a rise in Number of contracts
trading in non-precious metals and oil and natural gas as energy prices rose.
Number of
contracts, millions (bars) outstanding, millions (line)

Average daily commissions in OTC energy products on ICE rose 39% in


2,000 40

2007, representing the fourth consecutive year of record commissions.


Energy derivatives covering power and gas forward contracts in the OTC
derivatives markets have also grown in recent years (more on this can be
1,500 30

found in IFSL’s Derivatives report). 1,000 20

Exchange traded commodities

Exchange trading provides a central regulated market in which large numbers


500 10

of buyers and sellers can come together to deal in a competitive, transparent


and open environment. Derivatives exchanges are more standardised in terms
of contract sizes, maturity dates and margin requirements than OTC markets
0 0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

and tend to dominate trading of ‘soft commodities’. The vast majority of


Source: Bank for International Settlements

trading on commodity exchanges is in derivatives.

The physical and derivative trading of exchange traded commodities


Chart 6 Relative importance of exchange

increased more than a third in 2007 to reach 1,684 million contracts


traded commodities

(Chart 5). Agricultural contracts trading grew by 32%, energy 29% and
Commodities as % share
of global derivatives exchange trading

industrial metals 30% in 2007. Precious metals trading grew by 3%, with
20

higher volume in New York being partially offset by declining volume in


Tokyo. Over 40% of commodities trading on exchanges was conducted on
US exchanges and a quarter in China. Trading on exchanges in China, India
15

and Hong Kong has gained in importance in recent years.


10

Trading in agricultural products accounted for 46% of commodities trading


Turnover (contracts)

on exchanges in 2007, up from 36% in 1999. Energy products also increased


their share during this period, from 31% to 35%. This was mirrored by a fall
5

in metals trading from 33% to 19%. Although non-precious metals trading


Number of contracts outstanding

increased during this period, precious metals trading was relatively flat
0

causing a fall in metals trading overall share.


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Bank for International Settlements

3
IFSL Commodities Trading - June 2008

Types of trading on commodity exchanges Chart 7 Geographic split of exchange traded


Commodity exchanges facilitate both spot and derivatives trading:
commodity trading

- Actual transactions are traded on exchanges on the spot market with contracts for
% share, number of contracts
traded (of largest 25 exchanges), 2007

immediate or very quick delivery and include immediate payment. They only account for
a small proportion of trading on exchanges and are typically used to balance out a
Japan Others

marginal and temporary excess of either demand or supply on the physical market. In this
India 3%
5%

way the major commodity exchanges tend to set the market prices for their products all over
7%

the world. US
UK 42%

- Derivatives transactions (futures and options) account for the vast majority of trading on
17%

commodities markets. Futures are agreements to buy or sell a commodity for an agreed
price with the delivery taking place on a specified date in the future. Options are
agreements where one party acquires the right to buy or sell a commodity at some future
26%

date. For the most part the contracts are closed prior to the delivery date. Only a very small
percentage, usually less than two percent, of commodities derivatives contracts are ever
China

settled through deliveries. Total: 1,425 million

Commodity exchanges have gradually developed from physical


Source: Futures Industry Association

markets where deals were made out of warehouses to futures markets which
allow for both hedging to protect again losses in a declining market and
speculation for gains in a rising market. The derivatives markets for futures
were developed initially to help agricultural producers and consumers
manage their price risks. Turnover in exchange-traded commodity
derivatives increased from 2.8% of global exchange-traded Table 2 Largest commodity derivatives exchanges
derivatives in 2003 to 4.3% in 2007. During this period commodities’
share of the number of contracts outstanding increased from 6.7% to
Number of futures contracts traded (millions), 2007

10.9% (Chart 6). Prior to this, since the introduction of financial New York Mercantile Exchange US Energy, metals 353

futures in the 1970s, commodities’ relative contribution to overall Chicago Board Of Trade
Dalian Commodity Exchange China Agriculture 186

derivatives exchange trading had fallen.


US Agr., prec. met. 173
ICE Futures UK Energy 138

Largest commodity exchanges Worldwide, there are around 50 major


Zhengzhou Commodity Exchange China Agriculture 93
London Metal Exchange UK Non-prec. met. 93

commodity exchanges that trade in more than 90 commodities. ‘Soft


Shanghai Futures Exchange China Non-prec. met. 86

commodities’ are traded around the world and dominate exchange


Multi Commodity Exchange India Agricul., met. ener. 69
ICE Futures U.S. US Energy 50

trading in Asia and Latin America. Metals are predominantly traded


The Tokyo Commodity Exchange Japan Prec. met., energy 47

in London, New York, Chicago and Shanghai. Energy contracts are


National Comm. & Derivativ. Exch. India Agricul., met. ener. 35

mainly traded in New York, London, Tokyo and the Middle East.
BM&F Brazil Agricul., prec.met. 26
Chicago Mercantile Exchange US Agricult., prec. met. 21

More recently a number of energy exchanges have emerged in


Tokyo Grain Exchange Japan Agriculture 20

several European countries.


Liffe Derivatives Market UK Agriculture 11
Central Japan Commodity Exch. Japan Metals, energy, agr. 7
Kansas City Board Of Trade US Agriculture 5

In terms of the number of futures contracts traded, in 2007 China and


Winnipeg Commodity Exchange Canada Agriculture 3

the US had three exchanges amongst the largest ten, the UK two and
Malaysia Deriv. Exchange Berhad Malaysia Agriculture 3

Japan and India one each (Table 2). The New York Mercantile Source: Futures Industry Association, US
JSE Securities Exchange S. Africa Agriculture 2

Exchange was the largest commodities exchange in the world


followed by China’s Dalian Commodity Exchange and the Chicago Board of
Trade. The UK’s ICE Futures was fourth and the London Metal Exchange
sixth. Trading on exchanges is fairly concentrated. In 2007 the top five
exchanges accounted for around two-thirds of contracts traded globally
slightly down on their 70% share in 2003.

China and India have gained in importance in recent years with their
emergence as significant commodities consumers and producers. Over the
past decade a number of large exchanges have opened in China and India
such as the Shanghai Futures Exchange, Zhengzhou Commodity Exchange

4
IFSL Commodities Trading - June 2008

and the Dalian Commodity Exchange in China and the National Commodity Table 3 Turnover of London-based
and Derivatives Exchange and MCX in India. derivatives exchanges

LONDON AS A CENTRE FOR COMMODITIES DERIVATIVES


Millions of contracts traded each year

TRADING
ICE Futures
Europe1 Liffe2 LME EDX3 Total
1990 6.9 34.3 13.4 1.3 55.9

London is one of the main global centres for commodities trading along with
1995 15.0 136.4 47.2 3.1 201.7

New York and Chicago. While Chicago is predominantly a domestic market


1996 15.6 173.6 47.5 3.2 239.9
1997 14.7 209.3 57.4 4.4 285.8

London and New York source a large volume of international business.


1998 19.4 149.8 53.1 7.3 229.6

London hosts a number of major derivatives exchanges that trade in


1999 23.0 117.8 61.5 10.4 212.7

commodities products (Table 3): Liffe, the international derivatives business


2000 25.5 131.1 66.4 11.6 234.6
2001 26.4 619.1 59.4 15.9 720.8

of Euronext which trades ‘soft commodities’; the London Metal Exchange


2002 30.4 697.0 58.6 14.1 800.1

(LME) which specialises in non-ferrous metals; and ICE Futures which


2003 33.3 695.1 72.3 14.8 815.5
2004 35.5 787.8 71.9 21.5 916.7

trades in energy products. The London Bullion Market association, the


2005 42.1 759.3 78.6 20.3 900.3

world’s largest market for OTC precious metals trading, is located in London.
2006 92.7 730.3 86.9 28.8 938.8

The UK is also home to a number of international commodity organisations


2007 138.5 949.0 92.9 43.1 1,223.5
1IPE before 2005; 2Includes other Liffe exch. in Europe from 2001

including the International Coffee Organisation, International Cocoa


3EDX London was created in 2003

Organisation, International Sugar Organisation, International Grains Council


Source: Exchanges

and Grain and Feed Trade Association and International Rubber Study
Group.
London Metal Exchange is the world’s largest exchange for non-ferrous
Chart 8 London bullion market daily clearing

metals with a 90% share of global trading. The LME offers futures and
turnover

traded options contracts on six primary metals: aluminium, copper, nickel,


Ounces transferred (millions) Ounces transferred (millions)

tin, lead and zinc and two aluminum alloy contracts, as well as a composite
Gold Silver

index of these metals. Consumers as well as producers of metals use the


40 Silver (RH scale) 350

official prices of LME for their long term contracts pricing. Since May 2005
35 300

the range of contracts traded has been widened to include plastics contracts
Gold (LH scale)

including polypropylene and linear low density polyethylene. LME also


30 250

offers LMEminis, smaller-sized contracts for copper, aluminium and zinc,


25 200

plus an index contract. 20 150

The primary functions of the exchange are pricing, hedging and delivery: In
order to facilitate delivery, the LME approves storage facilities where traders
15 100

can make and take delivery. There are over 400 LME approved warehouses
10 50

in over 30 locations covering the US, Europe, the Middle & the Far East.
1998 2000 2002 2004 2006
1999 2001 2003 2005 2007

Trading on the exchange consists of open outcry trading in ‘the ring’,


Source: London Bullion Market Association

supported by a 24 hour telephone market and screen-based trading on LME


Select. Despite its London location the LME is a global market with an
international membership and with more than 95% of its business coming
from overseas.
Turnover of LME contracts increased by 9% in 2007 to reach a record 93
million lots, equivalent to $9,500 billion annually and between $35-45 billion
on an average business day. The Primary Aluminium contract saw futures
growth of over 10% in 2007, taking the total traded to over 40 million lots;
the Copper Grade A contract grew 13.6% to 21.4 million lots; the NASAAC
contract grew over 19% to 1.2 million lots; and the Aluminium Alloy contract
grew almost 11% to around 0.5 million lots.

ICE Futures Europe, a subsidiary of Intercontinental Exchange, is the


leading electronic regulated futures and options exchange for global energy

5
IFSL Commodities Trading - June 2008

markets. ICE Futures trades energy contracts including crude oil, heating oil, Table 4 Correlation of commodities with
natural gas and unleaded gas. It is used by producers, distributors and
other asset classes
consumers of energy to manage their price exposure in the physical energy S&P GSCI DJ-AIG

market. In April 2005 the exchange ended open outcry trading and moved to
Index correlations
(1992-2007) Total Commodity

an electronic platform.
Return Ind. Index
S&P GSCI Total 1.00 0.89

Turnover grew for the tenth consecutive year in 2007 to reach 139m
Return Index
DJ_AIG 0.89 1.00

contracts or over three times the level two years earlier. The ICE Brent Crude
Commodity Index

and WTI Crude futures contracts each set an annual volume record of 59.7m
S&P 500 0.00 0.10

and 51.4m respectively in 2007, surpassing the previous annual records by


Index
Lehman US 0.06 0.02

35% and 79%. In addition, the ICE Gas Oil futures contract set an annual
Aggregate Index
Source: AIG, Standard & Poor's, Lehman Brothers, Bloomberg
volume record of 24.5m contracts, exceeding last year’s volume of 18.3m
contracts by 34%.
Chart 9 Commodities as an asset class
Liffe is the international derivatives business of Euronext, now a subsidiary
of NYSE Euronext. It offers a single, electronic market for products listed on
% annual return, 1990-2007

its Amsterdam, Brussels, LIFFE, Lisbon and Paris exchanges. Liffe is


14

Europe’s biggest exchange for ‘soft commodities’. It began trading in 12 11.7%

derivatives in 1982 and expanded to include a wide range of derivatives


10.8%

products. Derivatives markets supported by its electronic trading platform,


10

LIFFE CONNECT, are available to customers at over 820 locations in 31


8 7.4%

countries. 6

In 2007 there was a total of 949m contracts traded on Liffe, of which 12.8m 4

were in commodities. Trading in commodities on Euronext.liffe has grown


2.8%

steadily in recent years and nearly tripled between 2001 and 2007. Robusta
2

coffee was the most widely traded commodity contract and accounted for 0

40% of commodity contracts in 2007, followed by cocoa with 27% and white
GSCI S&P 500 Lehman Br. Inflation (CPI)
US. Aggr. Indx.

sugar with 18%.


Source: Lehman Brothers, Standard & Poor's, BGI, Bloomberg

London Bullion Market Association (LBMA) is a representative body for Participants in the market
the bullion market whose members include banks, fabricators, refiners, There are two basic types of participants in the
shippers and brokers. Although the physical market for gold and silver is commodities markets: hedgers and investors.
distributed globally, most wholesale OTC trades are cleared through London. Historically, commodities were not a typical asset
Members of the LBMA typically trade with each other and with their clients class for financial investors. Commodity investing
on a principal-to-principal basis. typically attracted hedgers who needed to manage
the price impact of physical commodities on their
business. This included producers concerned with
Reported LBMA turnover in both gold and silver has gradually fallen over fixing prices on contracts to sell their products and
the past decade although there has been a pick-up in activity since the latter end-users that needed to hedge the prices at which
part of 2005 partly due to the rise in precious metals prices (Chart 8). The they purchased commodities.
decline in trading over the past decade was largely a result of a fall in In the past decade there has been a significant
proprietary trading by banks and brokerage companies. It should also be change. The shift originated in Europe and Asia
noted that the gross volume of London market turnover is probably three to where private and institutional investors sought to
hedge inflation and move away from equities. More
five times the reported turnover because transactions which are netted out are recently, record prices in oil, industrial goods and
cleared without appearing in the statistics. precious metals have attracted attracted many
investors and speculators to this sector.
APX Group operates power and gas exchanges for the wholesale market, A broader and more longer-term trend in recent
providing markets for short-term trading in the Netherlands, the UK and years has been that institutional investors such as
Belgium. APX Group is headquartered in Amsterdam but also has offices in pension funds and insurance companies looking to
London and Nottingham. diversify are investing more money into
commodities. Often these investments aren’t
directly in physical commodities themselves but in
indices linked to the price of commodities.

6
IFSL Commodities Trading - June 2008

COMMODITY INVESTMENTS
Chart 10 Performance of GSCI Subindexes
There has been a sharp upward trend in prices of commodities in recent years.
Prices of many commodities such as oil, nickel, tin, corn and wheat have
% annualised return, 1995-2007

reached record highs in early 2008. Commodity exporting countries have


benefited from this trend due to rapidly growing export revenue. Investments Agriculture

in the commodities sector have also accelerated, with between $150 and
$200bn invested in commodities indices in 2007 up from $10bn a decade
Energy

ago, and commodities have become an established part of the wider class of
alternative assets (Chart 12). Citigroup estimates that total funds invested in
Industrial Metals

commodity markets through indices, hedge funds, exchange traded funds and
short-term momentum players reached $400bn at the end of the first quarter
Livestock

of 2008, up from $330bn at the end of 2007. Precious Metals

Besides commodity specific factors, a number of more general factors are


behind the recent rise in commodity prices. Emerging economies have
-3 0 3 6 9 12 15

driven demand for various commodities (particularly markets in China, India


Source: GSCI

and the Middle East); biofuels have boosted the demand for specific food
crops; slow supply responses have amplified price pressures; important
linkages across commodities transmit higher prices; and low interest rates
Chart 11 Total return indexes

and the weakening of the dollar have been a supporting factor. The prospect
of lower global growth in 2008 and 2009 has prompted some concerns about
Index,

the future direction of commodity prices.


1997=100
DJ-AIG
250
Commodity

The sharp rise of commodities in recent years is in sharp contrast to the 1980s
Index

and 1990s when returns on commodities were not competitive with either
200

stocks or bonds. Commodity prices, measured in inflation adjusted terms,


GSCI

reached levels equivalent to their 1930s lows in 1999. Many factors have
150

contributed to this including: falling demand for commodities as a hedge


against inflation as inflation in developed countries was low; consumer 100
Reuters/Jefferies CRB

Types of commodities investments 50


1997 1999 2001 2003 2005 2007

Commodities can be used to diversify a portfolio of financial assets as they react differently
1998 2000 2002 2004 2006

to changing economic conditions compared to equities and bonds (Table 4). In the past Source: GSCI/ CRB
commodities played a small role in institutional and private investors’ portfolios (typically
below 4%). In recent years years however there has been increased investment in
commodities. Factors that have contributed to this include: the significant rise in prices of Chart 12 Capital invested in commodity
many commodities; their function as a hedge against inflation; economic uncertainty in
global markets; underinvestment in commodities production in the past two decades;
indices

rising demand particularly in Emerging markets such as China and India; and diversification
$bn

benefits. The development of investment products that passively track a broad range of 250
commodities have also made it easier for investors to access this market.

Investors can gain exposure to commodities through: direct investments in physical


200

commodities; direct investments in commodity-related companies (such as those in the area


of exploration and production of commodities) and investments in commodity futures 150
through exchange traded standardised contracts (on more than 70 exchanges globally where
commodity futures are traded). One of the simplest ways of investing in commodities is
through indexed commodity strategies. These offer access to a basket of commodities which
100

reduces the risk of investing as commodities themselves have low correlations. There are a
number of commodity indices. The most liquid index is the Goldman Sachs Commodities
50

Index (GSCI) launched in 1991. Other indices include the Dow Jones AIG commodity index,
Deutsche Bank Liquid Commodity Index (DBLCI) and the DBLCI-Mean Reversion Index,
Standard & Poor’s commodity index (SPCI) and Reuters/Jefferies CRB Index. Another way
0
2000 2001 2002 2003 2004 2005 2006 2007 20081

of investing in commodity indexes is to invest in tilted indices, towards a certain


1
forecast

commodity or groups of commodities. The GSCI has, for example, six sub-indices.
Source: Societe Generale

7
IFSL Commodities Trading - June 2008

spending in the U.S. which dominated global demand during the period,
shifted towards services that require fewer commodities to produce than IFSL Research:
manufactured goods; and much higher returns on equity markets. Report author: Marko Maslakovic
Director of Economics: Duncan McKenzie
Globally the recent increase in the value of commodity exports reflects trade d.mckenzie@ifsl.org.uk +44 (0)20 7213 9124

in fuel more than nonfuel commodities. Commodity exports continue to play Senior Economist: Marko Maslakovic
an important role in developing economies although their exports have m.maslakovic@ifsl.org.uk +44 (0)20 7213 9123
become much more diversified in terms of both composition and International Financial Services London
29-30 Cornhill, London, EC3V 3NF
destinations. The Middle East and north Africa and to a lesser extent www.ifsl.org.uk
sub-Saharan Africa and Latin America have been the main beneficiaries of ------------------------------------------------------
the recent boom in commodity prices. Fuel exports play the most critical role International Financial Services London (IFSL) is a private
in the Middle East and north Africa, where they now account for more than sector organisation, with nearly 40 years experience of
one-third of GDP. Latin America depends on both fuel and nonfuel successfully promoting the exports and expertise of UK-
based financial services industry throughout the world.
commodities whereas nonfuel commodities are particularly important in
sub-Saharan Africa. This report on Commodities Trading is one of 16 financial
sector reports in IFSL’s City Business Series. All IFSL’s
-------------------------------------------------------------------------------------------- reports can be downloaded at www.ifsl.org.uk.
LINKS TO OTHER SOURCES OF INFORMATION: © Copyright June 2008, IFSL
Bank for International Settlements (www.bis.org)
Ice Futures (www.theice.com) Data files
Euronext.liffe (www.euronext.com) Datafiles in excel format for all charts and tables published in
Futures and Options Association (www.foa.co.uk) this report can be downloaded from the Research section of
IFSL’s website www.ifsl.org.uk
Futures Industry Association (www.futuresindustry.org)
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London Bullion Market Association (www.lbma.org.uk) of new IFSL reports on the day of release please send your
London Metal Exchange (www.lme.co.uk) email address to download@ifsl.org.uk

The Silver Institute (www.silverinstitute.org)


World Gold Council (www.gold.org)
World Trade Organisation (www.wto.org)

In partnership with:

International Financial Services, City of London Corporation administers UK Trade & Investment helps UK-based
London is a private sector organisation, with and promotes the world’s leading international companies succeed in international markets
nearly 40 years experience of promoting the finance and business centre and provides free and assists overseas companies to bring high
UK-based financial services industry through- inward investment services. quality investment to the UK’s vibrant
out the world. economy.

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