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How Developing Nations Can Efficiently Use the Commodity Markets to Manage Their Risk

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How Developing Nations Can Efficiently Use the Commodity Markets to Manage Their Risk United Nations Conference on Trade and Development MULTI-YEAR EXPERT MEETING ON COMMODITIES AND DEVELOPMENT 21-22 April 2016, Geneva How developing nations can efficiently use the commodity markets to manage their risk By Mr. Robert Fig, Head, Physical Market Sales, London Metal Exchange The views expressed are those of the author and do not necessarily reflect the views of UNCTAD. Recent developments and new challenges in the commodity markets: Minerals Ores and Metals Presented by Robert Fig UNCTAD 21 April 2016 – London The Ring: global reference price The home of global metals markets since 1877 with London trading routes back to 1500’s 1800’s 1950’s 1970’s 1970s 1994-2016 2016 Leadenhall Street #10 Finsbury Square 1 The LME is the leading metal exchange LME Share of exchange metal traded 2015 LME market share 100% 100% 100% 93% 92% 91% 90% 80% 74% 70% 64% 60% 60% 50% 40% 30% 20% 10% 0% AA Al Cu NA Ni Pb Sn Zn 2 Global commodity markets are down Only Tin is up since 2007 whilst lead is flat Losses as much as 72% Nickel and 87% Baltic Dry Index 300 Index 2007=100 250 200 Tin +58% 150 Lead +2% 100 Cu -18% Oil -25% 50 Al -44% Zinc -55% Nickel -73% Baltic -87% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Copper 3 Month ($/mt) Nickel 3 Month ($/mt) Oil ($/bbl) Zinc ($/mt) Aluminium 3 Month ($/mt) Baltic Dry Index Lead 3 Month ($/mt) Tin 3 Month ($/mt) Data as of 14th April 2016 Source: LME, Bloomberg 3 Natural resources exposure Sum of resource rents as % of GDP *additional benefits from manufacturing and equipment Chile: Copper Zambia: Copper Angola: Oil 16% 16% 33% Australia: Iron Ore South Africa: Gold, Indonesia: Palm Oil, PGM’s 7% Copper, Nickel 8% 6% Source: World Bank, 2014 data 4 A diverse marketplace Smelters Consumers Recyclers Mining Merchants Cable, tube, and Recycling companies Smelter and Mining Companies Trading Houses automotive Scrap trading Refinery Companies companies companies Protect margins Protect against Protect value of Protect value of Protect value of during smelting increasing material mining assets physical stocks metal content process costs Orders Liquidity Market Brokers Banks Investors Makers 5 Physical usage of LME Copper Identified Client Volumes by type 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Producer / Merchant / Money Manager Algo/Prop Broker Dealer / Index Other Reportables Processor / User Trader Identified Client contract volume Source: LME Research 6 Hedging community dominates the LME Nickel Positions held by the hedging community outnumber money managers 1:1.6 Money Manager Positions> Hedging Positions Hedging Positions> Money Manager Positions Average over 12 months: CME LME LME Copper Copper Nickel 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 * COTR Open Interest Ratio is for Long+Short average over one year Entities are classified at broker discretion according to the primary function of the entity. Entities may be involved in dual business 7 Continued investment: physical relevance Pricing is anchored in the physical market thanks to a wide range of deliverable brands Copper Aluminium Bulgaria, 1 France, 2 Finland, 1 Montenegro, 1 Austria, 1 Slovakia, 1 Belgium, 1 Germany, 2 Copper Aluminium Germany, 2 Greece, 1 Russia, 3 Russia, 11 Copper Aluminium Norway, 1 Iceland, 3 Kazakhstan, 1 Canada, 1 Canada, 11 Poland, 3 Netherlands, 1 USA, 8 US, 9 Spain, 1 Norway, 6 Sweden, 1 Romania, 1 Spain, 2 UK, 1 Copper Aluminium China, 13 China, 17 India, 4 India, 8 Indonesia,1 Indonesia, 1 Japan, 8 Malaysia, 2 Copper Aluminium Laos, 1 Oman, 1 Oman, 1 South Korea, 2 Egypt, 1 Myanmar, 1 Iran, 1 Philippines, 1 Copper Aluminium UAE, 2 Brazil, 2 Argentina, 1 Bahrain, 1 Mexico, 1 Brazil, 5 Qatar, 1 Chile, 22 Venezuela, 1 Saudi Arabia, 1 Peru, 3 Copper Aluminium Zambia, 2 Mozambique, 1 Copper Aluminium South Africa, 1 South Africa, 1 Australia, 2 Australia, 4 Cameroon, 1 New Zealand, 1 8 Warehouse Locations Over 650 warehouses approved by the LME - 14 countries, 35 locations & LME Shield with MOU to develop along Belt and Road routes 1. Antwerp, Belgium 10.Vlissingen, Netherlands Silk Road Economic Belt 2. Bremen, Germany 11.Barcelona, Spain Maritime Silk Road 3. Hamburg, Germany 12.Bilbao, Spain 4. Genoa, Italy 13.Helsingborg, Sweden 5. Leghorn, Italy 14.Hull, UK 6. Ravenna, Italy 15.Liverpool, UK 7. Trieste, Italy 1. Busan, South Korea 8. Moerdijk, Netherlands 2. Gwangyang, South Korea 9. Rotterdam, Netherlands 3. Incheon, South Korea 1. Nagoya, Japan 1. Baltimore, Maryland 2. Yokohama, Japan 2. Chicago, Illinois 3. Detroit, Michigan 4. Los Angeles, California 5. Mobile, Alabama 1. Kaohsiung, Taiwan 6. New Orleans, Louisiana 7. Owensboro, Kentucky 8. Panama City, Florida 9. St. Louis, Missouri 10.Toledo, Ohio 1. Dubai, UAE 1. Johor, Malaysia 2. Singapore 3. Port Klang, Malaysia 9 LME remains the market of choice Copper Open interest in tonnes 18 16 Milliontonnes 14 12 10 8 6 4 2 0 LME SHFE CME 10 SHFE day trading bias 5x Open interest in days of volume 4x 3x LME SHFE 2x Open interest/ADV (Q4 2015)interest/ADV Open 1x 0x Aluminium Copper Zinc Nickel * Ratios taken over average of Q4 2015 – same trend LME>SHFE is consistent throughout history. LME volumes exclude admin and member give up trades 11 LME holds further out positions LME forward curve trades out to 63 months Shanghai open interest is concentrated on one month 50 $9,500 45 40 35 $9,000 30 Thousands 25 20 LME 15 $8,500 10 5 LME Nickel LME 0 $8,000 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Nov-16 Nov-17 Nov-18 Nov-19 Nov-20 Sep-17 Sep-16 Sep-18 Sep-19 Sep-20 May-16 May-20 May-17 May-18 May-19 May-21 Open Interest LME Nickel 3 Month ($/mt) 450 ¥71,000 400 350 ¥70,000 300 ¥69,000 250 200 ¥68,000 Thousands 150 100 ¥67,000 SHFE Nickel SHFE 50 0 ¥66,000 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Open Interest Last Price (CNY/mt) Data as of March 16th 2016 12 SHFE Nickel launches new arbitrage market 600,000 25% 500,000 Post launch avg: 15% 20% SHFE Contract launches March 400,000 27th 15% 300,000 10% 200,000 SHFE Nickel ADV SHFE Nickel ADV (lots) LME 3 Month Select LME3 ($/mt) MonthSelect Pre launch 5% 100,000 avg: 8% 0 0% ADV SHFE Nickel (lots) LME NI %age pre 7am ** Pre 7am % is limited to 3M outright on LMESelect 13 © The London Metal Exchange (the “LME”), 2016. The London Metal Exchange logo is a registered trademark of The London Metal Exchange. All rights reserved. All information contained within this document (the “Information”) is provided for reference purposes only. While the LME endeavours to ensure the accuracy, reliability and completeness of the Information, neither the LME, nor any of its affiliates makes any warranty or representation, express or implied, or accepts any responsibility or liability for, the accuracy, completeness, reliability or suitability of the Information for any particular purpose. The LME accepts no liability whatsoever to any person for any loss or damage arising from any inaccuracy or omission in the Information or from any consequence, decision, action or non-action based on or in reliance upon the Information. All proposed products described in this document are subject to contract, which may or may not be entered into, and regulatory approval, which may or may not be given. Some proposals may also be subject to consultation and therefore may or may not be implemented or may be implemented in a modified form. Following the conclusion of a consultation, regulatory approval may or may not be given to any proposal put forward. The terms of these proposed products, should they be launched, may differ from the terms described in this document. Distribution, redistribution, reproduction, modification or transmission of the Information in whole or in part, in any form or by any means are strictly prohibited without the prior written permission of the LME. The Information does not, and is not intended to, constitute investment advice, commentary or a recommendation to make any investment decision. The LME is not acting for any person to whom it has provided the Information. Persons receiving the Information are not clients of the LME and accordingly the LME is not responsible for providing any such persons with regulatory or other protections. All persons in receipt of the Information should obtain independent investment, legal, tax and other relevant advice before making any decisions based on the Information. LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from US futures and options customers for trading on the LME pursuant to CFTC rule 30.10. 14 .
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