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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, 17 July 23
APPROVED AMMONIA-FUELED CONTAINERSHIP - BENEFITS AND RISKS: REED SMITH
Following the news in Offshore Energy that Korea Maritime Consultants has secured approval in principle from the American Bureau of Shipping for it ...
Friday, 14 July 23
CLEAN COAL USE KEY TO DEEP CUTS IN EMISSIONS, STABLE ELECTRICITY SUPPLY - CHINA DAILY
China must push for the clean use of coal and step up integration of the dirty fuel with carbon capture, utilization and storage to achieve sustain ...
Thursday, 13 July 23
VIETNAM'S COAL EMISSIONS PRIMED FOR SURGE AFTER IMPORTS JUMP - REUTERS
Vietnam’s thermal power emissions are primed for a steep climb this summer after the country’s imports of thermal coal soared to their ...
Monday, 26 June 23
COAL PRODUCTION AND CONSUMPTION UP IN 2022 - EUROSTAT
In 2022, EU coal production and consumption continued to increase, reaching 349 million tonnes (+5% compared with the previous year) and 454 millio ...
Wednesday, 21 June 23
QATAR STRIKES SECOND BIG LNG SUPPLY DEAL WITH CHINA - REUTERS
Qatar on Tuesday secured its second large gas supply deal with a Chinese state-controlled company in less than a year, putting Asia clearly ahead i ...
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- ASAPP Information Group - India
- Eastern Coal Council - USA
- Sical Logistics Limited - India
- Heidelberg Cement - Germany
- Toyota Tsusho Corporation, Japan
- Georgia Ports Authority, United States
- Ceylon Electricity Board - Sri Lanka
- Iligan Light & Power Inc, Philippines
- The State Trading Corporation of India Ltd
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Agrawal Coal Company - India
- Kohat Cement Company Ltd. - Pakistan
- Africa Commodities Group - South Africa
- TNB Fuel Sdn Bhd - Malaysia
- Lanco Infratech Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Aditya Birla Group - India
- Ambuja Cements Ltd - India
- Xindia Steels Limited - India
- South Luzon Thermal Energy Corporation
- Mjunction Services Limited - India
- Salva Resources Pvt Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Therma Luzon, Inc, Philippines
- Bangladesh Power Developement Board
- Indo Tambangraya Megah - Indonesia
- San Jose City I Power Corp, Philippines
- PowerSource Philippines DevCo
- Rio Tinto Coal - Australia
- Bukit Makmur.PT - Indonesia
- Ministry of Mines - Canada
- Kalimantan Lumbung Energi - Indonesia
- GMR Energy Limited - India
- India Bulls Power Limited - India
- Leighton Contractors Pty Ltd - Australia
- TeaM Sual Corporation - Philippines
- The Treasury - Australian Government
- Intertek Mineral Services - Indonesia
- Carbofer General Trading SA - India
- Thai Mozambique Logistica
- Sinarmas Energy and Mining - Indonesia
- Bulk Trading Sa - Switzerland
- London Commodity Brokers - England
- Goldman Sachs - Singapore
- GN Power Mariveles Coal Plant, Philippines
- Global Green Power PLC Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Timah Investasi Mineral - Indoneisa
- Kideco Jaya Agung - Indonesia
- Chamber of Mines of South Africa
- Offshore Bulk Terminal Pte Ltd, Singapore
- Cement Manufacturers Association - India
- Bukit Asam (Persero) Tbk - Indonesia
- SMG Consultants - Indonesia
- Borneo Indobara - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Kepco SPC Power Corporation, Philippines
- Standard Chartered Bank - UAE
- PTC India Limited - India
- Dalmia Cement Bharat India
- Coalindo Energy - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Latin American Coal - Colombia
- Kobexindo Tractors - Indoneisa
- Larsen & Toubro Limited - India
- Merrill Lynch Commodities Europe
- SMC Global Power, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Formosa Plastics Group - Taiwan
- Karbindo Abesyapradhi - Indoneisa
- Electricity Authority, New Zealand
- European Bulk Services B.V. - Netherlands
- IHS Mccloskey Coal Group - USA
- Parry Sugars Refinery, India
- Anglo American - United Kingdom
- Indika Energy - Indonesia
- Meenaskhi Energy Private Limited - India
- Semirara Mining Corp, Philippines
- Global Coal Blending Company Limited - Australia
- Asmin Koalindo Tuhup - Indonesia
- VISA Power Limited - India
- Samtan Co., Ltd - South Korea
- PNOC Exploration Corporation - Philippines
- Kapuas Tunggal Persada - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Planning Commission, India
- Sindya Power Generating Company Private Ltd
- ICICI Bank Limited - India
- CIMB Investment Bank - Malaysia
- The University of Queensland
- Banpu Public Company Limited - Thailand
- Vedanta Resources Plc - India
- Indogreen Group - Indonesia
- Interocean Group of Companies - India
- Kartika Selabumi Mining - Indonesia
- Renaissance Capital - South Africa
- Coal and Oil Company - UAE
- Bhatia International Limited - India
- Global Business Power Corporation, Philippines
- Star Paper Mills Limited - India
- Indian Oil Corporation Limited
- Singapore Mercantile Exchange
- Bharathi Cement Corporation - India
- IEA Clean Coal Centre - UK
- McConnell Dowell - Australia
- Orica Australia Pty. Ltd.
- Economic Council, Georgia
- PetroVietnam Power Coal Import and Supply Company
- Essar Steel Hazira Ltd - India
- Mercator Lines Limited - India
- Antam Resourcindo - Indonesia
- Makarim & Taira - Indonesia
- Straits Asia Resources Limited - Singapore
- Electricity Generating Authority of Thailand
- Ministry of Finance - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Maheswari Brothers Coal Limited - India
- Mintek Dendrill Indonesia
- Krishnapatnam Port Company Ltd. - India
- Oldendorff Carriers - Singapore
- Mercuria Energy - Indonesia
- Eastern Energy - Thailand
- Savvy Resources Ltd - HongKong
- Manunggal Multi Energi - Indonesia
- Bukit Baiduri Energy - Indonesia
- International Coal Ventures Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Sojitz Corporation - Japan
- Jaiprakash Power Ventures ltd
- Pipit Mutiara Jaya. PT, Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Aboitiz Power Corporation - Philippines
- Vizag Seaport Private Limited - India
- Madhucon Powers Ltd - India
- OPG Power Generation Pvt Ltd - India
- CNBM International Corporation - China
- Maharashtra Electricity Regulatory Commission - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Independent Power Producers Association of India
- Bayan Resources Tbk. - Indonesia
- Central Java Power - Indonesia
- Thiess Contractors Indonesia
- Tata Chemicals Ltd - India
- Petron Corporation, Philippines
- Minerals Council of Australia
- Metalloyd Limited - United Kingdom
- Ministry of Transport, Egypt
- Riau Bara Harum - Indonesia
- Sakthi Sugars Limited - India
- Karaikal Port Pvt Ltd - India
- Deloitte Consulting - India
- Tamil Nadu electricity Board
- Indonesian Coal Mining Association
- Bahari Cakrawala Sebuku - Indonesia
- New Zealand Coal & Carbon
- Miang Besar Coal Terminal - Indonesia
- Australian Commodity Traders Exchange
- Siam City Cement - Thailand
- Videocon Industries ltd - India
- Binh Thuan Hamico - Vietnam
- Romanian Commodities Exchange
- Orica Mining Services - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Pendopo Energi Batubara - Indonesia
- Australian Coal Association
- Neyveli Lignite Corporation Ltd, - India
- Alfred C Toepfer International GmbH - Germany
- Kaltim Prima Coal - Indonesia
- Grasim Industreis Ltd - India
- Wood Mackenzie - Singapore
- Altura Mining Limited, Indonesia
- Kumho Petrochemical, South Korea
- Commonwealth Bank - Australia
- Baramulti Group, Indonesia
- MS Steel International - UAE
- Price Waterhouse Coopers - Russia
- Holcim Trading Pte Ltd - Singapore
- Uttam Galva Steels Limited - India
- Marubeni Corporation - India
- Ind-Barath Power Infra Limited - India
- Edison Trading Spa - Italy
- SN Aboitiz Power Inc, Philippines
- Meralco Power Generation, Philippines
- Cigading International Bulk Terminal - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- GAC Shipping (India) Pvt Ltd
- Coastal Gujarat Power Limited - India
- Bhoruka Overseas - Indonesia
- Simpson Spence & Young - Indonesia
- Sree Jayajothi Cements Limited - India
- White Energy Company Limited
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Power Finance Corporation Ltd., India
- Wilmar Investment Holdings
- Gujarat Sidhee Cement - India
- Parliament of New Zealand
- Indian Energy Exchange, India
- Bhushan Steel Limited - India
- Chettinad Cement Corporation Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Directorate Of Revenue Intelligence - India
- Billiton Holdings Pty Ltd - Australia
- Malabar Cements Ltd - India
- Posco Energy - South Korea
- Trasteel International SA, Italy
- Jindal Steel & Power Ltd - India
- Sarangani Energy Corporation, Philippines
- Attock Cement Pakistan Limited
- Energy Development Corp, Philippines
- Central Electricity Authority - India
- Siam City Cement PLC, Thailand
- Barasentosa Lestari - Indonesia
- Energy Link Ltd, New Zealand
- Globalindo Alam Lestari - Indonesia
- Medco Energi Mining Internasional
- GVK Power & Infra Limited - India
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