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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, 01 June 15
35,000 MW POWER PLANTS TO BOOST COAL CONSUMPTION - JP
The government’s program to develop 35,000 megawatt (MW) power plants will increase domestic coal consumption, which currently stands at arou ...
Monday, 01 June 15
API 5 FOB NEWCASTLE COAL SWAP; Q1'16 CLOSED LOWER COMPARED TO Q3'15
COALspot.com: API 5 FOB Newcastle Coal swap for Q3’ 2015 delivery gained US$ 0.36 per MT (0.80%) month over month. The swap was closed at US$ ...
Monday, 01 June 15
CFR SOUTH CHINA COAL SWAP: GAINED W-W, M-M; Q1'16 CLOSED HIGHER THAN Q3'15
COALspot.com: API 8 CFR South China Coal swap for Q3’ 2015 delivery up US$ 1.15 (2.26%) per MT month over month.
A commodity swap is a f ...
Sunday, 31 May 15
CAPE AND PANAMAX SEGMENTS SLIDE CONTINUES
COALspot.com: The BDI was up about 0.5 pct week on week and closed at 589 points while the cape index was fell 0.73 pct and closed at 810 po ...
Friday, 29 May 15
DRY BULK MARKET IS THE VICTIM OF A SHIFT IN DEMAND - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The fall in dry bulk freight rates is attributed, in large part, to the substantial decrease of China’s thermal coal imports, a major commodi ...
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- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Ministry of Mines - Canada
- Parry Sugars Refinery, India
- Price Waterhouse Coopers - Russia
- White Energy Company Limited
- Globalindo Alam Lestari - Indonesia
- Bhushan Steel Limited - India
- Latin American Coal - Colombia
- Formosa Plastics Group - Taiwan
- Global Business Power Corporation, Philippines
- CNBM International Corporation - China
- London Commodity Brokers - England
- Tamil Nadu electricity Board
- Interocean Group of Companies - India
- Aditya Birla Group - India
- Sarangani Energy Corporation, Philippines
- Vizag Seaport Private Limited - India
- Semirara Mining Corp, Philippines
- Bangladesh Power Developement Board
- CIMB Investment Bank - Malaysia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- GMR Energy Limited - India
- Binh Thuan Hamico - Vietnam
- Australian Commodity Traders Exchange
- Pendopo Energi Batubara - Indonesia
- Coalindo Energy - Indonesia
- Iligan Light & Power Inc, Philippines
- Standard Chartered Bank - UAE
- Leighton Contractors Pty Ltd - Australia
- Intertek Mineral Services - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bahari Cakrawala Sebuku - Indonesia
- Planning Commission, India
- Holcim Trading Pte Ltd - Singapore
- Dalmia Cement Bharat India
- Aboitiz Power Corporation - Philippines
- Renaissance Capital - South Africa
- Indika Energy - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Trasteel International SA, Italy
- SMC Global Power, Philippines
- Deloitte Consulting - India
- Ambuja Cements Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Semirara Mining and Power Corporation, Philippines
- Salva Resources Pvt Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Meenaskhi Energy Private Limited - India
- Indonesian Coal Mining Association
- TNB Fuel Sdn Bhd - Malaysia
- Wilmar Investment Holdings
- Sical Logistics Limited - India
- Parliament of New Zealand
- Karaikal Port Pvt Ltd - India
- Central Java Power - Indonesia
- Kumho Petrochemical, South Korea
- Lanco Infratech Ltd - India
- Borneo Indobara - Indonesia
- Ministry of Transport, Egypt
- Asmin Koalindo Tuhup - Indonesia
- Kideco Jaya Agung - Indonesia
- International Coal Ventures Pvt Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bayan Resources Tbk. - Indonesia
- Altura Mining Limited, Indonesia
- McConnell Dowell - Australia
- Malabar Cements Ltd - India
- New Zealand Coal & Carbon
- TeaM Sual Corporation - Philippines
- Cement Manufacturers Association - India
- Minerals Council of Australia
- Petron Corporation, Philippines
- Eastern Coal Council - USA
- Kartika Selabumi Mining - Indonesia
- Chamber of Mines of South Africa
- Gujarat Electricity Regulatory Commission - India
- Electricity Authority, New Zealand
- Merrill Lynch Commodities Europe
- Thai Mozambique Logistica
- The Treasury - Australian Government
- Agrawal Coal Company - India
- Edison Trading Spa - Italy
- Miang Besar Coal Terminal - Indonesia
- India Bulls Power Limited - India
- San Jose City I Power Corp, Philippines
- Banpu Public Company Limited - Thailand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Heidelberg Cement - Germany
- GN Power Mariveles Coal Plant, Philippines
- Mercuria Energy - Indonesia
- Jindal Steel & Power Ltd - India
- Videocon Industries ltd - India
- Chettinad Cement Corporation Ltd - India
- VISA Power Limited - India
- Cigading International Bulk Terminal - Indonesia
- The State Trading Corporation of India Ltd
- Makarim & Taira - Indonesia
- Bukit Makmur.PT - Indonesia
- Mjunction Services Limited - India
- Rashtriya Ispat Nigam Limited - India
- Commonwealth Bank - Australia
- Samtan Co., Ltd - South Korea
- GAC Shipping (India) Pvt Ltd
- LBH Netherlands Bv - Netherlands
- Coastal Gujarat Power Limited - India
- Bukit Baiduri Energy - Indonesia
- Gujarat Sidhee Cement - India
- Bhatia International Limited - India
- Orica Australia Pty. Ltd.
- Posco Energy - South Korea
- Anglo American - United Kingdom
- Medco Energi Mining Internasional
- Jorong Barutama Greston.PT - Indonesia
- Xindia Steels Limited - India
- Baramulti Group, Indonesia
- SMG Consultants - Indonesia
- Sindya Power Generating Company Private Ltd
- Sree Jayajothi Cements Limited - India
- Kaltim Prima Coal - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Sinarmas Energy and Mining - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- PNOC Exploration Corporation - Philippines
- Rio Tinto Coal - Australia
- Karbindo Abesyapradhi - Indoneisa
- Therma Luzon, Inc, Philippines
- Coal and Oil Company - UAE
- Ceylon Electricity Board - Sri Lanka
- Electricity Generating Authority of Thailand
- Indian Energy Exchange, India
- Metalloyd Limited - United Kingdom
- Mintek Dendrill Indonesia
- Madhucon Powers Ltd - India
- Mercator Lines Limited - India
- Grasim Industreis Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- OPG Power Generation Pvt Ltd - India
- IHS Mccloskey Coal Group - USA
- European Bulk Services B.V. - Netherlands
- Star Paper Mills Limited - India
- Simpson Spence & Young - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Thiess Contractors Indonesia
- ASAPP Information Group - India
- PowerSource Philippines DevCo
- Bharathi Cement Corporation - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Barasentosa Lestari - Indonesia
- Directorate Of Revenue Intelligence - India
- Antam Resourcindo - Indonesia
- Wood Mackenzie - Singapore
- PTC India Limited - India
- Bhoruka Overseas - Indonesia
- Jaiprakash Power Ventures ltd
- Petrochimia International Co. Ltd.- Taiwan
- Kepco SPC Power Corporation, Philippines
- Australian Coal Association
- Port Waratah Coal Services - Australia
- Maheswari Brothers Coal Limited - India
- Essar Steel Hazira Ltd - India
- Ministry of Finance - Indonesia
- Goldman Sachs - Singapore
- MS Steel International - UAE
- Attock Cement Pakistan Limited
- Manunggal Multi Energi - Indonesia
- Savvy Resources Ltd - HongKong
- Independent Power Producers Association of India
- Uttam Galva Steels Limited - India
- Sakthi Sugars Limited - India
- Economic Council, Georgia
- IEA Clean Coal Centre - UK
- Orica Mining Services - Indonesia
- Riau Bara Harum - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Singapore Mercantile Exchange
- Kobexindo Tractors - Indoneisa
- Neyveli Lignite Corporation Ltd, - India
- Toyota Tsusho Corporation, Japan
- Energy Link Ltd, New Zealand
- Timah Investasi Mineral - Indoneisa
- Siam City Cement - Thailand
- Larsen & Toubro Limited - India
- SN Aboitiz Power Inc, Philippines
- Ind-Barath Power Infra Limited - India
- Eastern Energy - Thailand
- Billiton Holdings Pty Ltd - Australia
- ICICI Bank Limited - India
- Oldendorff Carriers - Singapore
- Carbofer General Trading SA - India
- The University of Queensland
- Gujarat Mineral Development Corp Ltd - India
- Maharashtra Electricity Regulatory Commission - India
- Indian Oil Corporation Limited
- GVK Power & Infra Limited - India
- Alfred C Toepfer International GmbH - Germany
- Bulk Trading Sa - Switzerland
- Africa Commodities Group - South Africa
- Pipit Mutiara Jaya. PT, Indonesia
- Power Finance Corporation Ltd., India
- Georgia Ports Authority, United States
- Central Electricity Authority - India
- Tata Chemicals Ltd - India
- Indo Tambangraya Megah - Indonesia
- Energy Development Corp, Philippines
- Straits Asia Resources Limited - Singapore
- Global Green Power PLC Corporation, Philippines
- Meralco Power Generation, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Siam City Cement PLC, Thailand
- Romanian Commodities Exchange
- Vedanta Resources Plc - India
- Sojitz Corporation - Japan
- Indogreen Group - Indonesia
- Marubeni Corporation - India
- Global Coal Blending Company Limited - Australia
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