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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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Thursday, 25 January 24
THE RED SEA ESCALATION IMPLICATIONS ON GLOBAL SEABORNE TRADE - MARIA BERTZELETOU
In recent days, discussions have intensified about the potential impact on the seaborne trade and ton-miles due to the evolving dynamics of market ...
Thursday, 25 January 24
RED SEA SHIPPING DISRUPTIONS KEEP GEOPOLITICAL PREMIUM FOR COMMODITIES - FITCH RATINGS
Shipping disruptions and re-routing away from the Red Sea will maintain the geopolitical premium in the main commodity markets, including for oil a ...
Friday, 19 January 24
INDONESIA TARGETS 710 MLN METRIC TONS COAL OUTPUT IN 2024 AFTER RECORD 2023 - REUTERS
Indonesia, a major thermal coal exporter, aims to produce 710 million metric tons of coal in 2024, its mining minister said on Monday, after postin ...
Friday, 19 January 24
DRUMMOND COLOMBIA COAL OUTPUT ROSE 7.1% IN 2023 - REUTERS
Coal production from miner Drummond’s Colombia operations rose 7.1% in 2023 to 29.5 million metric tons, while exports declined by 2.6% to 27 ...
Friday, 19 January 24
CHINA'S 2023 COAL OUTPUT HITS RECORD HIGH - REUTERS
China’s coal output reached a record high in 2023, data from the statistics bureau showed on Wednesday, amid an ongoing focus on energy secur ...
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- Siam City Cement PLC, Thailand
- Planning Commission, India
- Bulk Trading Sa - Switzerland
- Gujarat Electricity Regulatory Commission - India
- Miang Besar Coal Terminal - Indonesia
- PNOC Exploration Corporation - Philippines
- Orica Australia Pty. Ltd.
- Directorate General of MIneral and Coal - Indonesia
- Barasentosa Lestari - Indonesia
- Central Electricity Authority - India
- Price Waterhouse Coopers - Russia
- Ind-Barath Power Infra Limited - India
- Electricity Generating Authority of Thailand
- Maharashtra Electricity Regulatory Commission - India
- Ambuja Cements Ltd - India
- Thai Mozambique Logistica
- Carbofer General Trading SA - India
- Bangladesh Power Developement Board
- IEA Clean Coal Centre - UK
- Xindia Steels Limited - India
- Economic Council, Georgia
- Metalloyd Limited - United Kingdom
- Vedanta Resources Plc - India
- Asmin Koalindo Tuhup - Indonesia
- GAC Shipping (India) Pvt Ltd
- Mercuria Energy - Indonesia
- Sakthi Sugars Limited - India
- SMG Consultants - Indonesia
- Savvy Resources Ltd - HongKong
- GN Power Mariveles Coal Plant, Philippines
- Simpson Spence & Young - Indonesia
- India Bulls Power Limited - India
- Altura Mining Limited, Indonesia
- Grasim Industreis Ltd - India
- Kideco Jaya Agung - Indonesia
- Posco Energy - South Korea
- TNB Fuel Sdn Bhd - Malaysia
- San Jose City I Power Corp, Philippines
- London Commodity Brokers - England
- Siam City Cement - Thailand
- Indogreen Group - Indonesia
- Therma Luzon, Inc, Philippines
- Marubeni Corporation - India
- Manunggal Multi Energi - Indonesia
- Eastern Coal Council - USA
- Port Waratah Coal Services - Australia
- PetroVietnam Power Coal Import and Supply Company
- Cigading International Bulk Terminal - Indonesia
- Bhoruka Overseas - Indonesia
- Chettinad Cement Corporation Ltd - India
- Bharathi Cement Corporation - India
- Meenaskhi Energy Private Limited - India
- Electricity Authority, New Zealand
- Mercator Lines Limited - India
- Australian Coal Association
- Lanco Infratech Ltd - India
- Borneo Indobara - Indonesia
- Sojitz Corporation - Japan
- Directorate Of Revenue Intelligence - India
- Antam Resourcindo - Indonesia
- Aditya Birla Group - India
- South Luzon Thermal Energy Corporation
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Anglo American - United Kingdom
- Samtan Co., Ltd - South Korea
- Independent Power Producers Association of India
- SMC Global Power, Philippines
- Aboitiz Power Corporation - Philippines
- Bukit Baiduri Energy - Indonesia
- Ministry of Finance - Indonesia
- Rio Tinto Coal - Australia
- Coal and Oil Company - UAE
- Gujarat Sidhee Cement - India
- Coalindo Energy - Indonesia
- European Bulk Services B.V. - Netherlands
- LBH Netherlands Bv - Netherlands
- Central Java Power - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Kartika Selabumi Mining - Indonesia
- Dalmia Cement Bharat India
- Gujarat Mineral Development Corp Ltd - India
- Intertek Mineral Services - Indonesia
- Globalindo Alam Lestari - Indonesia
- Trasteel International SA, Italy
- Wilmar Investment Holdings
- CNBM International Corporation - China
- Medco Energi Mining Internasional
- Salva Resources Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- Timah Investasi Mineral - Indoneisa
- Riau Bara Harum - Indonesia
- Indian Oil Corporation Limited
- Videocon Industries ltd - India
- Orica Mining Services - Indonesia
- Mintek Dendrill Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- SN Aboitiz Power Inc, Philippines
- Sindya Power Generating Company Private Ltd
- TeaM Sual Corporation - Philippines
- CIMB Investment Bank - Malaysia
- Singapore Mercantile Exchange
- The State Trading Corporation of India Ltd
- Parry Sugars Refinery, India
- ICICI Bank Limited - India
- Interocean Group of Companies - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Goldman Sachs - Singapore
- McConnell Dowell - Australia
- Sree Jayajothi Cements Limited - India
- Banpu Public Company Limited - Thailand
- Coastal Gujarat Power Limited - India
- Romanian Commodities Exchange
- Chamber of Mines of South Africa
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Energy Link Ltd, New Zealand
- Sical Logistics Limited - India
- Edison Trading Spa - Italy
- White Energy Company Limited
- Petrochimia International Co. Ltd.- Taiwan
- Commonwealth Bank - Australia
- PTC India Limited - India
- Essar Steel Hazira Ltd - India
- Jindal Steel & Power Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Latin American Coal - Colombia
- Tamil Nadu electricity Board
- International Coal Ventures Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Vizag Seaport Private Limited - India
- Jaiprakash Power Ventures ltd
- Offshore Bulk Terminal Pte Ltd, Singapore
- Neyveli Lignite Corporation Ltd, - India
- Larsen & Toubro Limited - India
- The Treasury - Australian Government
- Karbindo Abesyapradhi - Indoneisa
- Pendopo Energi Batubara - Indonesia
- Baramulti Group, Indonesia
- Parliament of New Zealand
- Eastern Energy - Thailand
- Toyota Tsusho Corporation, Japan
- Sarangani Energy Corporation, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Makarim & Taira - Indonesia
- Star Paper Mills Limited - India
- Georgia Ports Authority, United States
- Indika Energy - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Madhucon Powers Ltd - India
- IHS Mccloskey Coal Group - USA
- Semirara Mining Corp, Philippines
- Energy Development Corp, Philippines
- Uttam Galva Steels Limited - India
- Bayan Resources Tbk. - Indonesia
- Global Coal Blending Company Limited - Australia
- MS Steel International - UAE
- Rashtriya Ispat Nigam Limited - India
- The University of Queensland
- Deloitte Consulting - India
- Pipit Mutiara Jaya. PT, Indonesia
- Holcim Trading Pte Ltd - Singapore
- Minerals Council of Australia
- Agrawal Coal Company - India
- VISA Power Limited - India
- Petron Corporation, Philippines
- GMR Energy Limited - India
- Straits Asia Resources Limited - Singapore
- Ministry of Mines - Canada
- Ministry of Transport, Egypt
- Ceylon Electricity Board - Sri Lanka
- Bhatia International Limited - India
- Meralco Power Generation, Philippines
- Cement Manufacturers Association - India
- Bhushan Steel Limited - India
- Sinarmas Energy and Mining - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Maheswari Brothers Coal Limited - India
- Kepco SPC Power Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Indian Energy Exchange, India
- Global Green Power PLC Corporation, Philippines
- Attock Cement Pakistan Limited
- Indo Tambangraya Megah - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Power Finance Corporation Ltd., India
- New Zealand Coal & Carbon
- Kaltim Prima Coal - Indonesia
- Heidelberg Cement - Germany
- Alfred C Toepfer International GmbH - Germany
- Bukit Asam (Persero) Tbk - Indonesia
- Australian Commodity Traders Exchange
- Merrill Lynch Commodities Europe
- Kobexindo Tractors - Indoneisa
- Standard Chartered Bank - UAE
- GVK Power & Infra Limited - India
- Formosa Plastics Group - Taiwan
- Renaissance Capital - South Africa
- PowerSource Philippines DevCo
- Tata Chemicals Ltd - India
- Africa Commodities Group - South Africa
- Indonesian Coal Mining Association
- ASAPP Information Group - India
- Mjunction Services Limited - India
- Kumho Petrochemical, South Korea
- Karaikal Port Pvt Ltd - India
- Thiess Contractors Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Global Business Power Corporation, Philippines
- Krishnapatnam Port Company Ltd. - India
- OPG Power Generation Pvt Ltd - India
- Malabar Cements Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Wood Mackenzie - Singapore
- Iligan Light & Power Inc, Philippines
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