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Tuesday, 26 May 15
HOW HAS THE DROP IN OIL PRICES AFFECTED OTHER COMMODITIES? - CLYDE & CO
 KNOWLEDGE TO ELEVATE
The effects of the dramatic drop in the price of both Ice March Brent, the international oil marker, and its US counterpart Nymex March West Texas Intermediate, have been widespread. This is impacting not only the oil services industry, where many firms have cut their capital budgets as well as jobs, but also a number of markets across the world. The commodities market, in particular, has been widely affected with the prices of metals such as copper, lead and nickel dropping, albeit not as dramatically as oil, and the price of gold increasing.
In passing, it is worth noting that the death of King Abdullah in January 2015 prompted some investors to bet on a change in strategy as a result of the change in the leadership of Saudi Arabia, OPEC’s largest producer and de facto leader, with Crown Prince Salman succeeding King Abdullah. However, many analysts expect King Salman and Ali al-Naimi, Saudi Arabia’s oil minister, to stand by the existing Saudi oil policy, at least in the near term. That is, to allow market forces to determine the oil price and press ahead with unrestrained production of crude in order to eclipse more marginal producers and to not risk losing market share, despite the effects that this has had on the price of oil.
How has the drop in oil prices affected other commodities?
The sharp fall in oil prices amid deteriorating sentiment over the global economy has made investors weary of investing in other commodities.
Copper, in particular, has been hit very hard, slumping to its lowest price levels in nearly six years. This was triggered by aggressive selling by Chinese hedge funds earlier this month when the market was on the edge because of the collapse in the oil price and when physical demand in China was weak because of the approaching lunar New Year holiday. Other metals have also taken a hit, with nickel and lead experiencing recent sharp decreases.
As the price of oil has dropped, gold, on the other hand, has experienced its highest price level since August 2014 as many investors have sought to invest in the market to park their capital. With the Euro falling to an 11 year low as a result of a number of factors including the Swiss National Bank’s decision to decouple from the Euro and the European Central Bank’s quantitative easing measures, gold has risen very quickly.
On top of a growing trend for banks to dispose of their commodities businesses, there is a debate whether banks will continue to finance trading in commodities. Oil, at least in the near future, is likely to provide a low return with most commentators thinking that the price will not rise substantially for the foreseeable future, with some even going so as far as stating that the price will fall as low as USD20 per barrel. Therefore, the incentive for banks to finance this particular commodity would appear to have fallen away. This could see a space open for non-bank lenders to come into the market and play a much more active role in the financing of commodities. These entities are generally subject to less regulation and have access to a more diverse set of methods to inject capital into financings.
Impact on existing contracts
In the oil market, many, if not most participants will enter into hedging contracts against a price fluctuation. However, this is often a hedge against a rise in the oil price and some participants will, as a result of the current conditions, have found that they have been asked to make margin payments to hedge counterparties as they are ‘out of the money’ on the hedging contract.
Exit options?
Parties may find it difficult to remove themselves from their existing commodities contracts.
Force Majeure: A force majeure clause allows one party who has been subject to a pre-defined event to suspend performance under the contract, or , in a worst case scenario, allow one or both parties to terminate the contract. The key point to note is that performance by the affected party should be rendered impossible to perform (sometimes being severely hindered is also considered to constitute force majeure). Some parties may look to rely on this provision, however it is unlikely that the fall in oil prices will constitute a force majeure event under contracts.
Material Adverse Change clauses: There is a possibility that parties could look to material adverse change clauses in their agreements as a way of terminating their contracts. However, these clauses are usually drafted to concern the state of the individual contract participants (e.g. a party’s credit rating) rather than market realities. These provisions are also notoriously difficult to rely on in the event of a termination. Of course, if a party’s credit rating, for example, were to be affected because of the fall in oil prices, then this could provide an option for the other party to terminate under this type of provision.
What can parties do to counter the drop in oil prices?
It may be possible for parties to include, in future contracts, a clause which is effectively a ‘hedge’ to be triggered by a pre-determined event (for instance a defined rise or fall in the oil price, e.g. if oil drops below USDX per barrel). This could give parties the ability to re-price the contract in this event, to ensure the contract remains economically viable, or at least to be obliged to enter into good faith negotiations around re-pricing. Depending on the level of bargaining power between the parties, it may even be possible to incorporate such a fluctuation as a termination event.
Existing contracts could also be reviewed to see if there is the possibility of amending them to include such a clause, but re-negotiating an existing contract which does not have a contractual mechanism for this already built in would seem unlikely.
The full impact and the duration of the drop in oil prices remains to be seen; but what is certain is that this is a worrying time for the commodities market. Parties will have to consider the terms of their existing contracts as well as continuing to consider ways to mitigate risk when embarking on transactions in the future. This could include a renewed reliance upon derivatives as a way of protecting against price and foreign exchange risk.
Source: Clyde & Co | Hellenic Shipping News
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Friday, 06 September 24
REBOUND IN OIL DEMAND COULD LIFT MARKET IN LATTER HALF OF 2024 - BIMCO
Supply/demand
Based on a strong second half demand, the supply/balance is forecast to strengthen in 2024 but weaken slightly in 2025 as n ...
Friday, 06 September 24
GLOBAL SEABORNE LNG TRADE HAS CONTINUED TO INCREASE LAST YEAR - BANCHERO COSTA
Global seaborne LNG trade has continued to increase last year, helped also by the events in Ukraine which forced Europe to diversify away from Russ ...
Wednesday, 28 August 24
SEABORNE COAL IMPORTS INTO INDIA INCREASED BY +9.9% Y-O-Y TO 146.6 MLN T - BANCHERO COSTA
Global coal trade has really picked up pace over the past year, and is now fully back to pre-Covid levels said Banchero Costa Research in its lates ...
Tuesday, 06 August 24
EXERCISE CAUTION WITH AMMONIA SWITCH - BALTIC EXCHANGE
A new study from the Massachusetts Institute of Technology (MIT) has thrown a spanner into the plan to transition ships from diesel fuel to ammonia ...
Friday, 02 August 24
ENERGY MARKET DEVELOPMENTS: COAL AND NATURAL GAS PRICES REACH RECORD HIGHS - WORLD BANK
The recent surge in natural gas and coal prices has been so swift that the main benchmarks were roughly three times higher in 2022Q2 compared to a ...
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- Bhoruka Overseas - Indonesia
- Power Finance Corporation Ltd., India
- Ministry of Finance - Indonesia
- Kaltim Prima Coal - Indonesia
- Bayan Resources Tbk. - Indonesia
- Price Waterhouse Coopers - Russia
- Aditya Birla Group - India
- AsiaOL BioFuels Corp., Philippines
- Bangladesh Power Developement Board
- Global Business Power Corporation, Philippines
- Banpu Public Company Limited - Thailand
- Leighton Contractors Pty Ltd - Australia
- Xindia Steels Limited - India
- Coal and Oil Company - UAE
- Gujarat Mineral Development Corp Ltd - India
- Uttam Galva Steels Limited - India
- SMG Consultants - Indonesia
- VISA Power Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- IEA Clean Coal Centre - UK
- Planning Commission, India
- McConnell Dowell - Australia
- Chamber of Mines of South Africa
- Essar Steel Hazira Ltd - India
- PNOC Exploration Corporation - Philippines
- OPG Power Generation Pvt Ltd - India
- Meenaskhi Energy Private Limited - India
- Carbofer General Trading SA - India
- Bukit Asam (Persero) Tbk - Indonesia
- Global Coal Blending Company Limited - Australia
- Ceylon Electricity Board - Sri Lanka
- Simpson Spence & Young - Indonesia
- Deloitte Consulting - India
- Aboitiz Power Corporation - Philippines
- Lanco Infratech Ltd - India
- Grasim Industreis Ltd - India
- Maheswari Brothers Coal Limited - India
- India Bulls Power Limited - India
- Iligan Light & Power Inc, Philippines
- ASAPP Information Group - India
- Neyveli Lignite Corporation Ltd, - India
- Ministry of Transport, Egypt
- Thiess Contractors Indonesia
- Alfred C Toepfer International GmbH - Germany
- Africa Commodities Group - South Africa
- Vizag Seaport Private Limited - India
- SMC Global Power, Philippines
- Pendopo Energi Batubara - Indonesia
- Chettinad Cement Corporation Ltd - India
- Marubeni Corporation - India
- LBH Netherlands Bv - Netherlands
- PowerSource Philippines DevCo
- Bharathi Cement Corporation - India
- Siam City Cement - Thailand
- Toyota Tsusho Corporation, Japan
- Barasentosa Lestari - Indonesia
- Bukit Baiduri Energy - Indonesia
- Samtan Co., Ltd - South Korea
- TNB Fuel Sdn Bhd - Malaysia
- Central Electricity Authority - India
- Indo Tambangraya Megah - Indonesia
- Goldman Sachs - Singapore
- PetroVietnam Power Coal Import and Supply Company
- Economic Council, Georgia
- Kepco SPC Power Corporation, Philippines
- Tamil Nadu electricity Board
- Miang Besar Coal Terminal - Indonesia
- Therma Luzon, Inc, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Vedanta Resources Plc - India
- Krishnapatnam Port Company Ltd. - India
- Kobexindo Tractors - Indoneisa
- Indonesian Coal Mining Association
- Sakthi Sugars Limited - India
- Larsen & Toubro Limited - India
- Kumho Petrochemical, South Korea
- Siam City Cement PLC, Thailand
- Sree Jayajothi Cements Limited - India
- Intertek Mineral Services - Indonesia
- The State Trading Corporation of India Ltd
- Semirara Mining and Power Corporation, Philippines
- Anglo American - United Kingdom
- Commonwealth Bank - Australia
- Billiton Holdings Pty Ltd - Australia
- Edison Trading Spa - Italy
- Manunggal Multi Energi - Indonesia
- Mjunction Services Limited - India
- Videocon Industries ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- International Coal Ventures Pvt Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Coastal Gujarat Power Limited - India
- Gujarat Electricity Regulatory Commission - India
- Heidelberg Cement - Germany
- Parliament of New Zealand
- Attock Cement Pakistan Limited
- Cement Manufacturers Association - India
- Straits Asia Resources Limited - Singapore
- Eastern Energy - Thailand
- Globalindo Alam Lestari - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Parry Sugars Refinery, India
- Mercuria Energy - Indonesia
- Port Waratah Coal Services - Australia
- Jindal Steel & Power Ltd - India
- CIMB Investment Bank - Malaysia
- Singapore Mercantile Exchange
- Kalimantan Lumbung Energi - Indonesia
- Wilmar Investment Holdings
- Jaiprakash Power Ventures ltd
- New Zealand Coal & Carbon
- Altura Mining Limited, Indonesia
- Coalindo Energy - Indonesia
- Global Green Power PLC Corporation, Philippines
- ICICI Bank Limited - India
- Australian Commodity Traders Exchange
- CNBM International Corporation - China
- Thai Mozambique Logistica
- Standard Chartered Bank - UAE
- GMR Energy Limited - India
- Medco Energi Mining Internasional
- Tata Chemicals Ltd - India
- Merrill Lynch Commodities Europe
- Riau Bara Harum - Indonesia
- Savvy Resources Ltd - HongKong
- Borneo Indobara - Indonesia
- Sical Logistics Limited - India
- Electricity Generating Authority of Thailand
- Ministry of Mines - Canada
- Trasteel International SA, Italy
- Kapuas Tunggal Persada - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- SN Aboitiz Power Inc, Philippines
- Electricity Authority, New Zealand
- Meralco Power Generation, Philippines
- Eastern Coal Council - USA
- Orica Mining Services - Indonesia
- European Bulk Services B.V. - Netherlands
- Mercator Lines Limited - India
- Malabar Cements Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Minerals Council of Australia
- Salva Resources Pvt Ltd - India
- London Commodity Brokers - England
- Sindya Power Generating Company Private Ltd
- Karbindo Abesyapradhi - Indoneisa
- Kartika Selabumi Mining - Indonesia
- South Luzon Thermal Energy Corporation
- Baramulti Group, Indonesia
- IHS Mccloskey Coal Group - USA
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Mintek Dendrill Indonesia
- Kohat Cement Company Ltd. - Pakistan
- PTC India Limited - India
- Metalloyd Limited - United Kingdom
- Directorate General of MIneral and Coal - Indonesia
- Orica Australia Pty. Ltd.
- Semirara Mining Corp, Philippines
- Latin American Coal - Colombia
- Central Java Power - Indonesia
- Ambuja Cements Ltd - India
- Bhatia International Limited - India
- Kideco Jaya Agung - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Wood Mackenzie - Singapore
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Timah Investasi Mineral - Indoneisa
- Bukit Makmur.PT - Indonesia
- White Energy Company Limited
- GAC Shipping (India) Pvt Ltd
- Bulk Trading Sa - Switzerland
- Sarangani Energy Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- The Treasury - Australian Government
- The University of Queensland
- Independent Power Producers Association of India
- Petrochimia International Co. Ltd.- Taiwan
- Star Paper Mills Limited - India
- Dalmia Cement Bharat India
- Makarim & Taira - Indonesia
- Madhucon Powers Ltd - India
- GVK Power & Infra Limited - India
- Ind-Barath Power Infra Limited - India
- Australian Coal Association
- Bhushan Steel Limited - India
- Agrawal Coal Company - India
- Indika Energy - Indonesia
- Gujarat Sidhee Cement - India
- Georgia Ports Authority, United States
- Energy Development Corp, Philippines
- Directorate Of Revenue Intelligence - India
- Karaikal Port Pvt Ltd - India
- Indian Energy Exchange, India
- San Jose City I Power Corp, Philippines
- Antam Resourcindo - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Formosa Plastics Group - Taiwan
- Indogreen Group - Indonesia
- TeaM Sual Corporation - Philippines
- Holcim Trading Pte Ltd - Singapore
- Romanian Commodities Exchange
- Petron Corporation, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Rio Tinto Coal - Australia
- Interocean Group of Companies - India
- Binh Thuan Hamico - Vietnam
- Energy Link Ltd, New Zealand
- Rashtriya Ispat Nigam Limited - India
- MS Steel International - UAE
- Posco Energy - South Korea
- Jorong Barutama Greston.PT - Indonesia
- Sojitz Corporation - Japan
- Renaissance Capital - South Africa
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Indian Oil Corporation Limited
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