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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, 24 June 24
PHILIPPINES COAL SUPPLY ENOUGH UNTIL 2030 - PHILSTAR GLOBAL
The country’s existing coal-fired power plants are sufficient to ensure enough base load capacity in the next six years, Energy Secretary Rap ...
Friday, 14 June 24
NEXTDECADE, SAUDI ARAMCO SIGN 20-YEAR LNG SUPPLY DEAL - REUTERS
U.S. liquefied natural gas (LNG) provider NextDecade has signed a non-binding agreement with Saudi Aramco 2222.SE to supply 1.2 million tonnes per ...
Friday, 14 June 24
NEWBUILDING PRICES CLIMB 3% TO HIGHEST LEVEL IN 16 YEARS - NIELS RASMUSSEN
“Since the start of the year, newbuilding prices have risen 3% to their highest level since 2008. Compared to their most recent low in late 2 ...
Friday, 14 June 24
INDIA TARGETS HIGHER DOMESTIC COAL PRODUCTION, REDUCED IMPORTS: GOVT - REUTERS
India wants to reduce coal imports and increase domestic production, federal coal minister G. Kishan Reddy said on Thursday.
The cou ...
Thursday, 13 June 24
US LNG TO ASIA FOR POWER GENERATION EXPECTED TO CUT EMISSIONS VERSUS COAL - RYSTAD ENERGY
The value-chain emissions of liquified natural gas (LNG) are lower on average than for coal-fired power generation, even when the fuel is shipp ...
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- Australian Coal Association
- Coastal Gujarat Power Limited - India
- Therma Luzon, Inc, Philippines
- Bangladesh Power Developement Board
- Thiess Contractors Indonesia
- Petron Corporation, Philippines
- Tata Chemicals Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Semirara Mining and Power Corporation, Philippines
- Barasentosa Lestari - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Holcim Trading Pte Ltd - Singapore
- International Coal Ventures Pvt Ltd - India
- Agrawal Coal Company - India
- Vijayanagar Sugar Pvt Ltd - India
- Ministry of Finance - Indonesia
- Semirara Mining Corp, Philippines
- Meralco Power Generation, Philippines
- Rio Tinto Coal - Australia
- Jindal Steel & Power Ltd - India
- Gujarat Sidhee Cement - India
- Eastern Energy - Thailand
- Kideco Jaya Agung - Indonesia
- Pendopo Energi Batubara - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- South Luzon Thermal Energy Corporation
- Central Java Power - Indonesia
- Power Finance Corporation Ltd., India
- Commonwealth Bank - Australia
- San Jose City I Power Corp, Philippines
- India Bulls Power Limited - India
- Electricity Generating Authority of Thailand
- GN Power Mariveles Coal Plant, Philippines
- Siam City Cement PLC, Thailand
- White Energy Company Limited
- Indo Tambangraya Megah - Indonesia
- Intertek Mineral Services - Indonesia
- CIMB Investment Bank - Malaysia
- LBH Netherlands Bv - Netherlands
- Carbofer General Trading SA - India
- Anglo American - United Kingdom
- Port Waratah Coal Services - Australia
- Vizag Seaport Private Limited - India
- Straits Asia Resources Limited - Singapore
- SMG Consultants - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Heidelberg Cement - Germany
- Makarim & Taira - Indonesia
- Latin American Coal - Colombia
- SMC Global Power, Philippines
- Kaltim Prima Coal - Indonesia
- Ministry of Transport, Egypt
- Mintek Dendrill Indonesia
- Lanco Infratech Ltd - India
- ICICI Bank Limited - India
- Eastern Coal Council - USA
- Aditya Birla Group - India
- Independent Power Producers Association of India
- Savvy Resources Ltd - HongKong
- IEA Clean Coal Centre - UK
- Global Coal Blending Company Limited - Australia
- Energy Link Ltd, New Zealand
- Goldman Sachs - Singapore
- McConnell Dowell - Australia
- Salva Resources Pvt Ltd - India
- GMR Energy Limited - India
- Sojitz Corporation - Japan
- Malabar Cements Ltd - India
- Billiton Holdings Pty Ltd - Australia
- TNB Fuel Sdn Bhd - Malaysia
- Georgia Ports Authority, United States
- CNBM International Corporation - China
- Baramulti Group, Indonesia
- Bayan Resources Tbk. - Indonesia
- Binh Thuan Hamico - Vietnam
- Antam Resourcindo - Indonesia
- Sindya Power Generating Company Private Ltd
- Global Green Power PLC Corporation, Philippines
- Sakthi Sugars Limited - India
- Coal and Oil Company - UAE
- Wilmar Investment Holdings
- Ind-Barath Power Infra Limited - India
- Madhucon Powers Ltd - India
- London Commodity Brokers - England
- Parliament of New Zealand
- Orica Australia Pty. Ltd.
- Thai Mozambique Logistica
- Videocon Industries ltd - India
- ASAPP Information Group - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Trasteel International SA, Italy
- Oldendorff Carriers - Singapore
- Global Business Power Corporation, Philippines
- Ambuja Cements Ltd - India
- Interocean Group of Companies - India
- Medco Energi Mining Internasional
- Vedanta Resources Plc - India
- Kohat Cement Company Ltd. - Pakistan
- Minerals Council of Australia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bulk Trading Sa - Switzerland
- Bhatia International Limited - India
- PowerSource Philippines DevCo
- Bhushan Steel Limited - India
- Chamber of Mines of South Africa
- Dalmia Cement Bharat India
- Sinarmas Energy and Mining - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Xindia Steels Limited - India
- Gujarat Electricity Regulatory Commission - India
- The State Trading Corporation of India Ltd
- Toyota Tsusho Corporation, Japan
- Iligan Light & Power Inc, Philippines
- PTC India Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Mjunction Services Limited - India
- Jaiprakash Power Ventures ltd
- Wood Mackenzie - Singapore
- Kumho Petrochemical, South Korea
- Merrill Lynch Commodities Europe
- SN Aboitiz Power Inc, Philippines
- Renaissance Capital - South Africa
- Meenaskhi Energy Private Limited - India
- Parry Sugars Refinery, India
- Sarangani Energy Corporation, Philippines
- New Zealand Coal & Carbon
- Manunggal Multi Energi - Indonesia
- Star Paper Mills Limited - India
- Ministry of Mines - Canada
- Mercator Lines Limited - India
- Deloitte Consulting - India
- Simpson Spence & Young - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Cement Manufacturers Association - India
- Directorate General of MIneral and Coal - Indonesia
- Maheswari Brothers Coal Limited - India
- MS Steel International - UAE
- Price Waterhouse Coopers - Russia
- Banpu Public Company Limited - Thailand
- Singapore Mercantile Exchange
- Metalloyd Limited - United Kingdom
- Mercuria Energy - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Bukit Baiduri Energy - Indonesia
- Timah Investasi Mineral - Indoneisa
- VISA Power Limited - India
- Borneo Indobara - Indonesia
- Planning Commission, India
- Coalindo Energy - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Siam City Cement - Thailand
- Indian Oil Corporation Limited
- Bahari Cakrawala Sebuku - Indonesia
- Altura Mining Limited, Indonesia
- Attock Cement Pakistan Limited
- Cigading International Bulk Terminal - Indonesia
- Kepco SPC Power Corporation, Philippines
- Kobexindo Tractors - Indoneisa
- OPG Power Generation Pvt Ltd - India
- Karaikal Port Pvt Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Neyveli Lignite Corporation Ltd, - India
- Kartika Selabumi Mining - Indonesia
- GVK Power & Infra Limited - India
- Edison Trading Spa - Italy
- Electricity Authority, New Zealand
- Bhoruka Overseas - Indonesia
- European Bulk Services B.V. - Netherlands
- Indonesian Coal Mining Association
- Tamil Nadu electricity Board
- Gujarat Mineral Development Corp Ltd - India
- Essar Steel Hazira Ltd - India
- TeaM Sual Corporation - Philippines
- Chettinad Cement Corporation Ltd - India
- PNOC Exploration Corporation - Philippines
- The Treasury - Australian Government
- Bharathi Cement Corporation - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Ceylon Electricity Board - Sri Lanka
- Krishnapatnam Port Company Ltd. - India
- Indika Energy - Indonesia
- Romanian Commodities Exchange
- IHS Mccloskey Coal Group - USA
- Orica Mining Services - Indonesia
- Bukit Makmur.PT - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Central Electricity Authority - India
- Kapuas Tunggal Persada - Indonesia
- Directorate Of Revenue Intelligence - India
- Standard Chartered Bank - UAE
- Globalindo Alam Lestari - Indonesia
- Aboitiz Power Corporation - Philippines
- Energy Development Corp, Philippines
- Samtan Co., Ltd - South Korea
- Indian Energy Exchange, India
- GAC Shipping (India) Pvt Ltd
- Grasim Industreis Ltd - India
- Posco Energy - South Korea
- Uttam Galva Steels Limited - India
- Formosa Plastics Group - Taiwan
- Sical Logistics Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Sree Jayajothi Cements Limited - India
- Riau Bara Harum - Indonesia
- Marubeni Corporation - India
- Australian Commodity Traders Exchange
- Africa Commodities Group - South Africa
- Bukit Asam (Persero) Tbk - Indonesia
- Economic Council, Georgia
- Indogreen Group - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- The University of Queensland
- Larsen & Toubro Limited - India
- Leighton Contractors Pty Ltd - Australia
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