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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, 01 December 23
COAL MINERS GROUP EXPECTS INDONESIA’S 2023 COAL OUTPUT TO SURPASS TARGET - REUTERS
The Indonesian Coal Mining Association (ICMA) expects the country’s 2023 coal output to surpass the official target of 695 million metric ton ...
Friday, 24 November 23
COAL IMPORTS TO INDIA IN OCTOBER 2023 REACHED HIGHEST LEVELS IN NEARLY A YEAR AND A HALF - VESSELSVALUE, VESON NAUTICAL
In October, coal imports to India reached 13.8 mt in October 2023, according to Oceanbolt, a Veson Nautical solution, the highest level since May 2 ...
Friday, 24 November 23
COAL SHIPMENTS TO ADVANCED ECONOMIES DOWN 17% SO FAR IN 2023 - BIMCO
In the first ten months of 2023, coal shipments to advanced economies fell by 17% y/y, as demand for electricity declined and the share of electric ...
Friday, 24 November 23
INTELLIGENT COAL MINES CONTRIBUTE TO IMPROVING SAFETY STANDARDS - CHINA DAILY
Mechanization, automation and intelligent upgrades have contributed to improved safety in coal mines, though the level of development of intelligen ...
Friday, 24 November 23
WHY AUSTRALIA'S COAL MINES ARE GETTING BIGGER - IEEFA
Australia’s largest coal mines are getting larger. Mines in New South Wales (NSW) are ramping up production following the state’s recov ...
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- Krishnapatnam Port Company Ltd. - India
- Romanian Commodities Exchange
- Aboitiz Power Corporation - Philippines
- Mercator Lines Limited - India
- Cigading International Bulk Terminal - Indonesia
- Therma Luzon, Inc, Philippines
- Renaissance Capital - South Africa
- Energy Link Ltd, New Zealand
- VISA Power Limited - India
- CNBM International Corporation - China
- SMG Consultants - Indonesia
- Parliament of New Zealand
- Minerals Council of Australia
- Sarangani Energy Corporation, Philippines
- Kumho Petrochemical, South Korea
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Gujarat Sidhee Cement - India
- Coalindo Energy - Indonesia
- Altura Mining Limited, Indonesia
- Oldendorff Carriers - Singapore
- Madhucon Powers Ltd - India
- Formosa Plastics Group - Taiwan
- Global Coal Blending Company Limited - Australia
- Timah Investasi Mineral - Indoneisa
- Thiess Contractors Indonesia
- Kartika Selabumi Mining - Indonesia
- Ministry of Transport, Egypt
- Malabar Cements Ltd - India
- Coal and Oil Company - UAE
- Orica Mining Services - Indonesia
- Aditya Birla Group - India
- Straits Asia Resources Limited - Singapore
- The State Trading Corporation of India Ltd
- Neyveli Lignite Corporation Ltd, - India
- Mjunction Services Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Videocon Industries ltd - India
- Global Business Power Corporation, Philippines
- Meenaskhi Energy Private Limited - India
- Manunggal Multi Energi - Indonesia
- Wilmar Investment Holdings
- Kepco SPC Power Corporation, Philippines
- Leighton Contractors Pty Ltd - Australia
- Indian Energy Exchange, India
- Central Java Power - Indonesia
- Toyota Tsusho Corporation, Japan
- South Luzon Thermal Energy Corporation
- Commonwealth Bank - Australia
- Petrochimia International Co. Ltd.- Taiwan
- TNB Fuel Sdn Bhd - Malaysia
- Salva Resources Pvt Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Kohat Cement Company Ltd. - Pakistan
- ICICI Bank Limited - India
- Siam City Cement - Thailand
- Carbofer General Trading SA - India
- Star Paper Mills Limited - India
- Tamil Nadu electricity Board
- PTC India Limited - India
- Indo Tambangraya Megah - Indonesia
- PNOC Exploration Corporation - Philippines
- Vedanta Resources Plc - India
- CIMB Investment Bank - Malaysia
- Rio Tinto Coal - Australia
- IHS Mccloskey Coal Group - USA
- Orica Australia Pty. Ltd.
- Thai Mozambique Logistica
- Energy Development Corp, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Mercuria Energy - Indonesia
- Kaltim Prima Coal - Indonesia
- Port Waratah Coal Services - Australia
- Jindal Steel & Power Ltd - India
- Australian Commodity Traders Exchange
- Bayan Resources Tbk. - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Deloitte Consulting - India
- Bahari Cakrawala Sebuku - Indonesia
- Larsen & Toubro Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Ministry of Mines - Canada
- Cement Manufacturers Association - India
- Bulk Trading Sa - Switzerland
- India Bulls Power Limited - India
- New Zealand Coal & Carbon
- Pipit Mutiara Jaya. PT, Indonesia
- Parry Sugars Refinery, India
- Gujarat Electricity Regulatory Commission - India
- Singapore Mercantile Exchange
- Essar Steel Hazira Ltd - India
- Edison Trading Spa - Italy
- McConnell Dowell - Australia
- Attock Cement Pakistan Limited
- Australian Coal Association
- Africa Commodities Group - South Africa
- Baramulti Group, Indonesia
- Directorate General of MIneral and Coal - Indonesia
- LBH Netherlands Bv - Netherlands
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Chamber of Mines of South Africa
- Borneo Indobara - Indonesia
- Dalmia Cement Bharat India
- Offshore Bulk Terminal Pte Ltd, Singapore
- White Energy Company Limited
- San Jose City I Power Corp, Philippines
- ASAPP Information Group - India
- Bukit Asam (Persero) Tbk - Indonesia
- Antam Resourcindo - Indonesia
- Bharathi Cement Corporation - India
- OPG Power Generation Pvt Ltd - India
- Bhushan Steel Limited - India
- Merrill Lynch Commodities Europe
- Sakthi Sugars Limited - India
- Pendopo Energi Batubara - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Grasim Industreis Ltd - India
- Posco Energy - South Korea
- Karbindo Abesyapradhi - Indoneisa
- TeaM Sual Corporation - Philippines
- Eastern Coal Council - USA
- Marubeni Corporation - India
- London Commodity Brokers - England
- Semirara Mining and Power Corporation, Philippines
- Intertek Mineral Services - Indonesia
- Interocean Group of Companies - India
- Bukit Baiduri Energy - Indonesia
- Latin American Coal - Colombia
- The Treasury - Australian Government
- Sindya Power Generating Company Private Ltd
- Electricity Generating Authority of Thailand
- Economic Council, Georgia
- Bhoruka Overseas - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Indian Oil Corporation Limited
- Bank of Tokyo Mitsubishi UFJ Ltd
- Maharashtra Electricity Regulatory Commission - India
- Indika Energy - Indonesia
- Power Finance Corporation Ltd., India
- Coastal Gujarat Power Limited - India
- Wood Mackenzie - Singapore
- Makarim & Taira - Indonesia
- International Coal Ventures Pvt Ltd - India
- Jaiprakash Power Ventures ltd
- Vizag Seaport Private Limited - India
- Planning Commission, India
- Maheswari Brothers Coal Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- GAC Shipping (India) Pvt Ltd
- Savvy Resources Ltd - HongKong
- Miang Besar Coal Terminal - Indonesia
- Heidelberg Cement - Germany
- Standard Chartered Bank - UAE
- Sical Logistics Limited - India
- Goldman Sachs - Singapore
- Sree Jayajothi Cements Limited - India
- Indonesian Coal Mining Association
- Indogreen Group - Indonesia
- Bukit Makmur.PT - Indonesia
- Siam City Cement PLC, Thailand
- Uttam Galva Steels Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Sojitz Corporation - Japan
- MS Steel International - UAE
- Petron Corporation, Philippines
- Georgia Ports Authority, United States
- Bangladesh Power Developement Board
- Banpu Public Company Limited - Thailand
- Lanco Infratech Ltd - India
- Iligan Light & Power Inc, Philippines
- PowerSource Philippines DevCo
- Eastern Energy - Thailand
- Bhatia International Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Ministry of Finance - Indonesia
- Meralco Power Generation, Philippines
- Simpson Spence & Young - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Directorate Of Revenue Intelligence - India
- Holcim Trading Pte Ltd - Singapore
- Global Green Power PLC Corporation, Philippines
- Central Electricity Authority - India
- Price Waterhouse Coopers - Russia
- Agrawal Coal Company - India
- Xindia Steels Limited - India
- Ind-Barath Power Infra Limited - India
- GVK Power & Infra Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Mintek Dendrill Indonesia
- Riau Bara Harum - Indonesia
- Electricity Authority, New Zealand
- Karaikal Port Pvt Ltd - India
- IEA Clean Coal Centre - UK
- Tata Chemicals Ltd - India
- Trasteel International SA, Italy
- Kideco Jaya Agung - Indonesia
- Medco Energi Mining Internasional
- Binh Thuan Hamico - Vietnam
- SMC Global Power, Philippines
- Kobexindo Tractors - Indoneisa
- Samtan Co., Ltd - South Korea
- Ambuja Cements Ltd - India
- Rashtriya Ispat Nigam Limited - India
- GMR Energy Limited - India
- SN Aboitiz Power Inc, Philippines
- Semirara Mining Corp, Philippines
- European Bulk Services B.V. - Netherlands
- The University of Queensland
- Chettinad Cement Corporation Ltd - India
- Barasentosa Lestari - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Anglo American - United Kingdom
- Globalindo Alam Lestari - Indonesia
- Metalloyd Limited - United Kingdom
- Independent Power Producers Association of India
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