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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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Monday, 08 January 24
KOSPO TO BUY 80000 MT OF INDONESIAN LOW CALORIFIC VALUE COAL FOR FEB 2024
Korea Southern Power Co., Ltd. (KOSPO), is inviting bids for the supply of Indonesian Low Calorific Value Coal from qualified suppliers for Korean ...
Monday, 08 January 24
SEABORNE TRADE REACHES 12.4BN TONNES - CLARKSONS
China will establish a back-up coal production system by 2027 to stabilise prices and secure coal supply, the state planner said on Wednesday, even ...
Monday, 08 January 24
CAPESIZES START THE NEW YEAR ON POSITIVE NOTE - BALTIC EXCHANGE
Capesize
This week the capsize market has been marked by a mix of activities and challenges. Despite a slow start following the Christmas and N ...
Friday, 05 January 24
MORGAN STANLEY SEES LOWER OIL PRICES IN 2024 ON OVERSUPPLY CONCERNS - REUTERS
Morgan Stanley sees Brent crude prices anchored near $80 per barrel in the first half in 2024 before declining towards the end of the year as it ex ...
Friday, 05 January 24
INDIA'S COAL OUTPUT RISES NEARLY 11 PC IN DEC TO 92.87 MT - PTI
India’s coal production increased by 10.75 per cent to 92.87 million tonne in December 2023 as compared to the year-ago period, an official s ...
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- Pendopo Energi Batubara - Indonesia
- Merrill Lynch Commodities Europe
- Australian Coal Association
- Petron Corporation, Philippines
- Kepco SPC Power Corporation, Philippines
- Leighton Contractors Pty Ltd - Australia
- Coalindo Energy - Indonesia
- Ministry of Transport, Egypt
- Bangladesh Power Developement Board
- Billiton Holdings Pty Ltd - Australia
- Formosa Plastics Group - Taiwan
- Kobexindo Tractors - Indoneisa
- Vedanta Resources Plc - India
- GMR Energy Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Vizag Seaport Private Limited - India
- Independent Power Producers Association of India
- Xindia Steels Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Carbofer General Trading SA - India
- Grasim Industreis Ltd - India
- Bhoruka Overseas - Indonesia
- Karaikal Port Pvt Ltd - India
- Uttam Galva Steels Limited - India
- Mercuria Energy - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Neyveli Lignite Corporation Ltd, - India
- Planning Commission, India
- Manunggal Multi Energi - Indonesia
- Mintek Dendrill Indonesia
- Power Finance Corporation Ltd., India
- MS Steel International - UAE
- Sarangani Energy Corporation, Philippines
- CNBM International Corporation - China
- Edison Trading Spa - Italy
- SMG Consultants - Indonesia
- PNOC Exploration Corporation - Philippines
- Indogreen Group - Indonesia
- Bukit Baiduri Energy - Indonesia
- Bhushan Steel Limited - India
- Wood Mackenzie - Singapore
- Bayan Resources Tbk. - Indonesia
- Economic Council, Georgia
- Central Electricity Authority - India
- Sojitz Corporation - Japan
- Mercator Lines Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Africa Commodities Group - South Africa
- Global Green Power PLC Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Ministry of Mines - Canada
- Directorate Of Revenue Intelligence - India
- SN Aboitiz Power Inc, Philippines
- Siam City Cement PLC, Thailand
- Simpson Spence & Young - Indonesia
- Georgia Ports Authority, United States
- Essar Steel Hazira Ltd - India
- Orica Mining Services - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Sinarmas Energy and Mining - Indonesia
- Bukit Makmur.PT - Indonesia
- Meenaskhi Energy Private Limited - India
- Savvy Resources Ltd - HongKong
- Parry Sugars Refinery, India
- Indo Tambangraya Megah - Indonesia
- Rio Tinto Coal - Australia
- Samtan Co., Ltd - South Korea
- Kalimantan Lumbung Energi - Indonesia
- Kartika Selabumi Mining - Indonesia
- Medco Energi Mining Internasional
- Barasentosa Lestari - Indonesia
- IHS Mccloskey Coal Group - USA
- Rashtriya Ispat Nigam Limited - India
- Coastal Gujarat Power Limited - India
- Kaltim Prima Coal - Indonesia
- Meralco Power Generation, Philippines
- Sical Logistics Limited - India
- Jaiprakash Power Ventures ltd
- White Energy Company Limited
- Global Coal Blending Company Limited - Australia
- Posco Energy - South Korea
- Ambuja Cements Ltd - India
- Jindal Steel & Power Ltd - India
- Trasteel International SA, Italy
- Port Waratah Coal Services - Australia
- Minerals Council of Australia
- Price Waterhouse Coopers - Russia
- Krishnapatnam Port Company Ltd. - India
- SMC Global Power, Philippines
- Metalloyd Limited - United Kingdom
- Sree Jayajothi Cements Limited - India
- Oldendorff Carriers - Singapore
- OPG Power Generation Pvt Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Thiess Contractors Indonesia
- Banpu Public Company Limited - Thailand
- LBH Netherlands Bv - Netherlands
- The Treasury - Australian Government
- Attock Cement Pakistan Limited
- Romanian Commodities Exchange
- Standard Chartered Bank - UAE
- Gujarat Sidhee Cement - India
- Bhatia International Limited - India
- Australian Commodity Traders Exchange
- Cigading International Bulk Terminal - Indonesia
- The University of Queensland
- India Bulls Power Limited - India
- TeaM Sual Corporation - Philippines
- Interocean Group of Companies - India
- Iligan Light & Power Inc, Philippines
- Anglo American - United Kingdom
- Coal and Oil Company - UAE
- Energy Link Ltd, New Zealand
- CIMB Investment Bank - Malaysia
- Kumho Petrochemical, South Korea
- Electricity Generating Authority of Thailand
- Semirara Mining and Power Corporation, Philippines
- Borneo Indobara - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Therma Luzon, Inc, Philippines
- PowerSource Philippines DevCo
- Central Java Power - Indonesia
- Wilmar Investment Holdings
- Parliament of New Zealand
- Holcim Trading Pte Ltd - Singapore
- Makarim & Taira - Indonesia
- Marubeni Corporation - India
- GAC Shipping (India) Pvt Ltd
- VISA Power Limited - India
- Thai Mozambique Logistica
- Agrawal Coal Company - India
- Goldman Sachs - Singapore
- Indian Energy Exchange, India
- Chettinad Cement Corporation Ltd - India
- Indika Energy - Indonesia
- Antam Resourcindo - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Semirara Mining Corp, Philippines
- Cement Manufacturers Association - India
- Star Paper Mills Limited - India
- San Jose City I Power Corp, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Altura Mining Limited, Indonesia
- Electricity Authority, New Zealand
- Bank of Tokyo Mitsubishi UFJ Ltd
- Malabar Cements Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Mjunction Services Limited - India
- Miang Besar Coal Terminal - Indonesia
- Sindya Power Generating Company Private Ltd
- Sakthi Sugars Limited - India
- Binh Thuan Hamico - Vietnam
- Salva Resources Pvt Ltd - India
- McConnell Dowell - Australia
- TNB Fuel Sdn Bhd - Malaysia
- Eastern Energy - Thailand
- GVK Power & Infra Limited - India
- Tamil Nadu electricity Board
- Bharathi Cement Corporation - India
- New Zealand Coal & Carbon
- Larsen & Toubro Limited - India
- Bulk Trading Sa - Switzerland
- Madhucon Powers Ltd - India
- Lanco Infratech Ltd - India
- Maheswari Brothers Coal Limited - India
- South Luzon Thermal Energy Corporation
- Chamber of Mines of South Africa
- Offshore Bulk Terminal Pte Ltd, Singapore
- Gujarat Mineral Development Corp Ltd - India
- The State Trading Corporation of India Ltd
- Riau Bara Harum - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Toyota Tsusho Corporation, Japan
- ASAPP Information Group - India
- Globalindo Alam Lestari - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Timah Investasi Mineral - Indoneisa
- Baramulti Group, Indonesia
- Eastern Coal Council - USA
- Energy Development Corp, Philippines
- Kideco Jaya Agung - Indonesia
- PTC India Limited - India
- ICICI Bank Limited - India
- Siam City Cement - Thailand
- Aditya Birla Group - India
- Kapuas Tunggal Persada - Indonesia
- London Commodity Brokers - England
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Latin American Coal - Colombia
- Orica Australia Pty. Ltd.
- Indonesian Coal Mining Association
- Gujarat Electricity Regulatory Commission - India
- Renaissance Capital - South Africa
- International Coal Ventures Pvt Ltd - India
- Singapore Mercantile Exchange
- Ind-Barath Power Infra Limited - India
- Ministry of Finance - Indonesia
- Deloitte Consulting - India
- IEA Clean Coal Centre - UK
- Straits Asia Resources Limited - Singapore
- Dalmia Cement Bharat India
- Global Business Power Corporation, Philippines
- Asmin Koalindo Tuhup - Indonesia
- European Bulk Services B.V. - Netherlands
- Commonwealth Bank - Australia
- Indian Oil Corporation Limited
- Videocon Industries ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Intertek Mineral Services - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Tata Chemicals Ltd - India
- Aboitiz Power Corporation - Philippines
- Heidelberg Cement - Germany
- AsiaOL BioFuels Corp., Philippines
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