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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, 02 August 24
COAL MARKET DEVELOPMENTS: FALLING PRICES AMID RECORD-HIGH OUTPUT - WORLD BANK
Coal prices inched up in May (m/m) following an 8 percent decline in 2024Q1. The Australian and South African benchmarks have plummeted more ...
Friday, 26 July 24
FUELEU MARITME IS COMING. IS YOUR CHARTERPARTY READY? - GARD
With less than six months to implementation of FuelEU Maritime in EU and EEA trades, there has been little published advice regarding how to alloca ...
Thursday, 04 July 24
INDIA'S COAL PRODUCTION RISES 14% IN JUNE - PTI
The country’s coal production rose by 14.49% to 84.63 million tonne (MT) in June. The country’s coal output was 73.92 MT in June last f ...
Tuesday, 02 July 24
NTPC CAPTIVE COAL OUTPUT GROWS 15% IN Q1; DESPATCH RISES 17%
State-owned NTPC on Monday reported a 15 per cent year-on-year increase in the production of coal from captives mines to 9.862 metric million tonne ...
Friday, 28 June 24
KOSPO INVITED BIDS FOR 400,000 MT OF MINIMUM 4000 NCV COAL FOR FIVE YEARS
Korea Southern Power Co., Ltd. (KOSPO), is inviting bids for total 400,000 MT of Low Calorific Value Coal for 5 years starting from July 2024 until ...
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- Kartika Selabumi Mining - Indonesia
- Romanian Commodities Exchange
- Krishnapatnam Port Company Ltd. - India
- Kepco SPC Power Corporation, Philippines
- Altura Mining Limited, Indonesia
- South Luzon Thermal Energy Corporation
- Offshore Bulk Terminal Pte Ltd, Singapore
- Indian Energy Exchange, India
- Economic Council, Georgia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Tata Chemicals Ltd - India
- PowerSource Philippines DevCo
- Goldman Sachs - Singapore
- Agrawal Coal Company - India
- Sojitz Corporation - Japan
- Bayan Resources Tbk. - Indonesia
- Sakthi Sugars Limited - India
- The State Trading Corporation of India Ltd
- Sarangani Energy Corporation, Philippines
- Semirara Mining and Power Corporation, Philippines
- Simpson Spence & Young - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Barasentosa Lestari - Indonesia
- Singapore Mercantile Exchange
- Heidelberg Cement - Germany
- Dalmia Cement Bharat India
- Kohat Cement Company Ltd. - Pakistan
- Mjunction Services Limited - India
- PNOC Exploration Corporation - Philippines
- Ministry of Mines - Canada
- Price Waterhouse Coopers - Russia
- Toyota Tsusho Corporation, Japan
- Minerals Council of Australia
- Indogreen Group - Indonesia
- San Jose City I Power Corp, Philippines
- Mintek Dendrill Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Electricity Authority, New Zealand
- Independent Power Producers Association of India
- Edison Trading Spa - Italy
- PTC India Limited - India
- Carbofer General Trading SA - India
- Salva Resources Pvt Ltd - India
- The Treasury - Australian Government
- Central Electricity Authority - India
- Holcim Trading Pte Ltd - Singapore
- Bharathi Cement Corporation - India
- Jorong Barutama Greston.PT - Indonesia
- Ambuja Cements Ltd - India
- Sree Jayajothi Cements Limited - India
- Binh Thuan Hamico - Vietnam
- McConnell Dowell - Australia
- India Bulls Power Limited - India
- Central Java Power - Indonesia
- Ministry of Transport, Egypt
- The University of Queensland
- Deloitte Consulting - India
- Wood Mackenzie - Singapore
- Georgia Ports Authority, United States
- Merrill Lynch Commodities Europe
- Eastern Coal Council - USA
- Antam Resourcindo - Indonesia
- Therma Luzon, Inc, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Pendopo Energi Batubara - Indonesia
- Malabar Cements Ltd - India
- Global Business Power Corporation, Philippines
- Bangladesh Power Developement Board
- Iligan Light & Power Inc, Philippines
- Intertek Mineral Services - Indonesia
- Meenaskhi Energy Private Limited - India
- Electricity Generating Authority of Thailand
- Uttam Galva Steels Limited - India
- Indo Tambangraya Megah - Indonesia
- Grasim Industreis Ltd - India
- Rio Tinto Coal - Australia
- Sindya Power Generating Company Private Ltd
- Gujarat Electricity Regulatory Commission - India
- International Coal Ventures Pvt Ltd - India
- Cement Manufacturers Association - India
- Jindal Steel & Power Ltd - India
- Vedanta Resources Plc - India
- Semirara Mining Corp, Philippines
- Manunggal Multi Energi - Indonesia
- Coal and Oil Company - UAE
- Africa Commodities Group - South Africa
- Globalindo Alam Lestari - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- ASAPP Information Group - India
- Rashtriya Ispat Nigam Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Billiton Holdings Pty Ltd - Australia
- Gujarat Sidhee Cement - India
- Kumho Petrochemical, South Korea
- Aboitiz Power Corporation - Philippines
- Alfred C Toepfer International GmbH - Germany
- Tamil Nadu electricity Board
- ICICI Bank Limited - India
- Coalindo Energy - Indonesia
- Commonwealth Bank - Australia
- Australian Coal Association
- Latin American Coal - Colombia
- MS Steel International - UAE
- Directorate General of MIneral and Coal - Indonesia
- Mercuria Energy - Indonesia
- SMG Consultants - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Kapuas Tunggal Persada - Indonesia
- Maheswari Brothers Coal Limited - India
- Bhushan Steel Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Attock Cement Pakistan Limited
- Energy Link Ltd, New Zealand
- Port Waratah Coal Services - Australia
- Orica Mining Services - Indonesia
- Energy Development Corp, Philippines
- Indika Energy - Indonesia
- LBH Netherlands Bv - Netherlands
- Vizag Seaport Private Limited - India
- Cigading International Bulk Terminal - Indonesia
- Star Paper Mills Limited - India
- Kaltim Prima Coal - Indonesia
- Parry Sugars Refinery, India
- Metalloyd Limited - United Kingdom
- Ministry of Finance - Indonesia
- Ind-Barath Power Infra Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Australian Commodity Traders Exchange
- Xindia Steels Limited - India
- OPG Power Generation Pvt Ltd - India
- Planning Commission, India
- GVK Power & Infra Limited - India
- Renaissance Capital - South Africa
- SMC Global Power, Philippines
- CNBM International Corporation - China
- Thiess Contractors Indonesia
- Savvy Resources Ltd - HongKong
- Siam City Cement PLC, Thailand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Aditya Birla Group - India
- Jaiprakash Power Ventures ltd
- Trasteel International SA, Italy
- Essar Steel Hazira Ltd - India
- Riau Bara Harum - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- White Energy Company Limited
- Siam City Cement - Thailand
- Timah Investasi Mineral - Indoneisa
- GMR Energy Limited - India
- Chettinad Cement Corporation Ltd - India
- Kobexindo Tractors - Indoneisa
- Directorate Of Revenue Intelligence - India
- Asmin Koalindo Tuhup - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Medco Energi Mining Internasional
- Meralco Power Generation, Philippines
- SN Aboitiz Power Inc, Philippines
- Baramulti Group, Indonesia
- Parliament of New Zealand
- Leighton Contractors Pty Ltd - Australia
- Thai Mozambique Logistica
- AsiaOL BioFuels Corp., Philippines
- Mercator Lines Limited - India
- Madhucon Powers Ltd - India
- Bukit Makmur.PT - Indonesia
- Bhatia International Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Kalimantan Lumbung Energi - Indonesia
- Posco Energy - South Korea
- Makarim & Taira - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Borneo Indobara - Indonesia
- CIMB Investment Bank - Malaysia
- Wilmar Investment Holdings
- IEA Clean Coal Centre - UK
- Marubeni Corporation - India
- European Bulk Services B.V. - Netherlands
- Interocean Group of Companies - India
- Lanco Infratech Ltd - India
- Karaikal Port Pvt Ltd - India
- Straits Asia Resources Limited - Singapore
- Samtan Co., Ltd - South Korea
- Banpu Public Company Limited - Thailand
- Eastern Energy - Thailand
- Petron Corporation, Philippines
- Videocon Industries ltd - India
- Maharashtra Electricity Regulatory Commission - India
- GN Power Mariveles Coal Plant, Philippines
- Formosa Plastics Group - Taiwan
- Anglo American - United Kingdom
- IHS Mccloskey Coal Group - USA
- London Commodity Brokers - England
- Orica Australia Pty. Ltd.
- Bukit Asam (Persero) Tbk - Indonesia
- Global Coal Blending Company Limited - Australia
- Global Green Power PLC Corporation, Philippines
- Power Finance Corporation Ltd., India
- Coastal Gujarat Power Limited - India
- Bhoruka Overseas - Indonesia
- New Zealand Coal & Carbon
- Bukit Baiduri Energy - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kideco Jaya Agung - Indonesia
- TeaM Sual Corporation - Philippines
- Standard Chartered Bank - UAE
- GAC Shipping (India) Pvt Ltd
- Miang Besar Coal Terminal - Indonesia
- Larsen & Toubro Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Indian Oil Corporation Limited
- Indonesian Coal Mining Association
- Bulk Trading Sa - Switzerland
- Sical Logistics Limited - India
- Oldendorff Carriers - Singapore
- Chamber of Mines of South Africa
- VISA Power Limited - India
- Ceylon Electricity Board - Sri Lanka
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