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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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- Siam City Cement - Thailand
- Lanco Infratech Ltd - India
- New Zealand Coal & Carbon
- Ministry of Transport, Egypt
- Sree Jayajothi Cements Limited - India
- Global Coal Blending Company Limited - Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Semirara Mining and Power Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Ind-Barath Power Infra Limited - India
- Electricity Authority, New Zealand
- Banpu Public Company Limited - Thailand
- ASAPP Information Group - India
- Thiess Contractors Indonesia
- Wood Mackenzie - Singapore
- Semirara Mining Corp, Philippines
- GMR Energy Limited - India
- Attock Cement Pakistan Limited
- Kideco Jaya Agung - Indonesia
- Samtan Co., Ltd - South Korea
- Power Finance Corporation Ltd., India
- Kohat Cement Company Ltd. - Pakistan
- Formosa Plastics Group - Taiwan
- Bhushan Steel Limited - India
- Merrill Lynch Commodities Europe
- Maharashtra Electricity Regulatory Commission - India
- Bangladesh Power Developement Board
- Ambuja Cements Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Mjunction Services Limited - India
- Ceylon Electricity Board - Sri Lanka
- GVK Power & Infra Limited - India
- Interocean Group of Companies - India
- Renaissance Capital - South Africa
- Petrochimia International Co. Ltd.- Taiwan
- Chettinad Cement Corporation Ltd - India
- Parry Sugars Refinery, India
- Posco Energy - South Korea
- Carbofer General Trading SA - India
- Karaikal Port Pvt Ltd - India
- Edison Trading Spa - Italy
- Bukit Baiduri Energy - Indonesia
- Indonesian Coal Mining Association
- San Jose City I Power Corp, Philippines
- Indogreen Group - Indonesia
- Madhucon Powers Ltd - India
- Deloitte Consulting - India
- Indian Energy Exchange, India
- Port Waratah Coal Services - Australia
- Pendopo Energi Batubara - Indonesia
- Siam City Cement PLC, Thailand
- Sarangani Energy Corporation, Philippines
- Ministry of Mines - Canada
- Straits Asia Resources Limited - Singapore
- Gujarat Sidhee Cement - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Manunggal Multi Energi - Indonesia
- Eastern Coal Council - USA
- Uttam Galva Steels Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- PNOC Exploration Corporation - Philippines
- Sical Logistics Limited - India
- Agrawal Coal Company - India
- GN Power Mariveles Coal Plant, Philippines
- Barasentosa Lestari - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Chamber of Mines of South Africa
- Thai Mozambique Logistica
- Coalindo Energy - Indonesia
- Bayan Resources Tbk. - Indonesia
- Price Waterhouse Coopers - Russia
- Central Java Power - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Global Green Power PLC Corporation, Philippines
- International Coal Ventures Pvt Ltd - India
- Energy Link Ltd, New Zealand
- Billiton Holdings Pty Ltd - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- SMC Global Power, Philippines
- Vedanta Resources Plc - India
- Independent Power Producers Association of India
- Bharathi Cement Corporation - India
- Simpson Spence & Young - Indonesia
- Standard Chartered Bank - UAE
- Mercator Lines Limited - India
- Rashtriya Ispat Nigam Limited - India
- Australian Coal Association
- Savvy Resources Ltd - HongKong
- Indo Tambangraya Megah - Indonesia
- Latin American Coal - Colombia
- Malabar Cements Ltd - India
- Medco Energi Mining Internasional
- AsiaOL BioFuels Corp., Philippines
- LBH Netherlands Bv - Netherlands
- McConnell Dowell - Australia
- White Energy Company Limited
- Economic Council, Georgia
- Aboitiz Power Corporation - Philippines
- The University of Queensland
- Indika Energy - Indonesia
- Africa Commodities Group - South Africa
- Romanian Commodities Exchange
- Ministry of Finance - Indonesia
- Meenaskhi Energy Private Limited - India
- OPG Power Generation Pvt Ltd - India
- Salva Resources Pvt Ltd - India
- CNBM International Corporation - China
- Larsen & Toubro Limited - India
- Sinarmas Energy and Mining - Indonesia
- Iligan Light & Power Inc, Philippines
- London Commodity Brokers - England
- The Treasury - Australian Government
- Australian Commodity Traders Exchange
- Borneo Indobara - Indonesia
- IHS Mccloskey Coal Group - USA
- Georgia Ports Authority, United States
- The State Trading Corporation of India Ltd
- Intertek Mineral Services - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Sakthi Sugars Limited - India
- Tata Chemicals Ltd - India
- Anglo American - United Kingdom
- Leighton Contractors Pty Ltd - Australia
- Miang Besar Coal Terminal - Indonesia
- Petron Corporation, Philippines
- Vizag Seaport Private Limited - India
- Globalindo Alam Lestari - Indonesia
- Jindal Steel & Power Ltd - India
- Essar Steel Hazira Ltd - India
- Planning Commission, India
- Mintek Dendrill Indonesia
- IEA Clean Coal Centre - UK
- Eastern Energy - Thailand
- Tamil Nadu electricity Board
- Toyota Tsusho Corporation, Japan
- Dalmia Cement Bharat India
- Cigading International Bulk Terminal - Indonesia
- Wilmar Investment Holdings
- Kapuas Tunggal Persada - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Riau Bara Harum - Indonesia
- Aditya Birla Group - India
- Mercuria Energy - Indonesia
- Sojitz Corporation - Japan
- India Bulls Power Limited - India
- Kaltim Prima Coal - Indonesia
- CIMB Investment Bank - Malaysia
- Bukit Makmur.PT - Indonesia
- Parliament of New Zealand
- Metalloyd Limited - United Kingdom
- Meralco Power Generation, Philippines
- VISA Power Limited - India
- SN Aboitiz Power Inc, Philippines
- Electricity Generating Authority of Thailand
- Timah Investasi Mineral - Indoneisa
- ICICI Bank Limited - India
- Alfred C Toepfer International GmbH - Germany
- Singapore Mercantile Exchange
- Rio Tinto Coal - Australia
- Bulk Trading Sa - Switzerland
- Antam Resourcindo - Indonesia
- Grasim Industreis Ltd - India
- Kepco SPC Power Corporation, Philippines
- Kobexindo Tractors - Indoneisa
- Global Business Power Corporation, Philippines
- Heidelberg Cement - Germany
- Jaiprakash Power Ventures ltd
- Coastal Gujarat Power Limited - India
- Orica Mining Services - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Xindia Steels Limited - India
- Bhatia International Limited - India
- Orica Australia Pty. Ltd.
- Makarim & Taira - Indonesia
- Commonwealth Bank - Australia
- Gujarat Electricity Regulatory Commission - India
- Kumho Petrochemical, South Korea
- Oldendorff Carriers - Singapore
- Cement Manufacturers Association - India
- Altura Mining Limited, Indonesia
- PTC India Limited - India
- European Bulk Services B.V. - Netherlands
- TeaM Sual Corporation - Philippines
- Karbindo Abesyapradhi - Indoneisa
- Star Paper Mills Limited - India
- Kartika Selabumi Mining - Indonesia
- Therma Luzon, Inc, Philippines
- GAC Shipping (India) Pvt Ltd
- PowerSource Philippines DevCo
- Holcim Trading Pte Ltd - Singapore
- MS Steel International - UAE
- Kalimantan Lumbung Energi - Indonesia
- Coal and Oil Company - UAE
- Marubeni Corporation - India
- Indian Oil Corporation Limited
- Gujarat Mineral Development Corp Ltd - India
- Maheswari Brothers Coal Limited - India
- Bhoruka Overseas - Indonesia
- Trasteel International SA, Italy
- Neyveli Lignite Corporation Ltd, - India
- Energy Development Corp, Philippines
- Goldman Sachs - Singapore
- South Luzon Thermal Energy Corporation
- Minerals Council of Australia
- SMG Consultants - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Videocon Industries ltd - India
- Baramulti Group, Indonesia
- Directorate Of Revenue Intelligence - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Sindya Power Generating Company Private Ltd
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Central Electricity Authority - India
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