A Dummy’s Guide for FX traders


Commodities are a fascinating and diversified world, even more than FX. I recently received a spectacular research paper from Deutsche Bank: “A User Guide to Commodities” 135 pages (!) With such a powerful source of data and information at my disposal I have tried to highlight some basic facts as a starting point. Whoever would like to go deeper in understanding these markets should find this reading interesting.

After putting down a map of different commodity classes and their brief description, we’ve decided to show some tables for main exporters and importers in most relevant markets. This should be relevant in judging term of trade impact from change in prices that usually affects currencies levels. For such a scope export / import rankings are a better info than producers/consumers rankings. In precious metals case (gold and silver) only this second set of data was available but for these kind commodities ranking should not be significantly different.

Data are quite recent (2010) and volumes data have been converted in US Dollars amounts (using June 14th futures closing prices on relevant markets) to give a better idea of relative importance of different commodities flows: crude oil is definitely a league of its own in terms of size.


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Energy Products

Global energy consumption has increased by nearly 60% over the last 25 years and is likely to rise another 35-40% in the next 25. Oil provides approximately 35% of total primary energy consumption that is primary fuels that are commercially traded. Despite the implications for global warming and the environment, coal accounts for 26% of total energy use followed by natural gas, which meets 23% of energy demand. Nuclear energy currently provides 6% of the total and renewable, including hydropower, account for approximately10%.

Looking ahead, DB expects that it will require the development and expansion of all economic energy sources to meet rapid population growth, economic expansion, urbanization, and the improvement in living standards underway in many parts of the developing world. Even allowing for rapid growth in alternative energy, the world economy will remain heavily dependent on fossil fuels, including coal, oil and natural gas, over the next two to three decades.

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Precious Metals

Precious metals production ranges from nearly 22,800 tons for silver to a mere 7.8 tons for iridium.

One of the major distinguishing features of the gold market compared to other commodities is that annual mine production for gold is less than 10% of total above ground stocks. This tends to mean that the gold forward curve is always in contango and level of volatility tends to be lower than other commodity markets where inventories are significantly lower compared to annual demand and supply.

Gold held by central banks amounted to just over 30,500 tons as of the end of March 2011. The lion’s share of these holdings is held by the United States, Germany, Italy and France. These countries’ gold holdings are equivalent to around two-thirds of their total reserves, compared to a world average of just over 11%. Gold to total reserve ratios are significantly lower in Asia and the Middle East and in some circumstances below 3% of total reserves. The performance of the gold price has been closely linked to the course of the US dollar and the level of real interest rates in the United States.

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Industrial Metals

The benchmark contracts of this sector are listed on the London Metal Exchange (LME). The LME was founded in 1877 and much of the business is still conducted through open outcry trading in the ‘Ring.’ Volume on the LME is dominated by aluminum, copper and zinc contracts, which combined represent around 85% of all turnover on the exchange. The LME is a highly liquid market and in 2010 turnover reached a new record of 120 million lots, equivalent to USD11.6 trillion. During 2010 the LME increased the number of listed futures contracts with, for example, cobalt and molybdenum.

One of the most important trends during the past decade had been China’s voracious appetite for industrial raw materials, which has accelerated since the country joined the World Trade Organization in 2001. This has led the country’s share of world consumption of not only industrial metals, but all major raw materials to increase substantially.

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Agricultural Products

By 2050, the United Nations estimates that the world’s population will reach 9.5 billion people compared to approximately 6.5 billion today. India will represent 20% of this growth compared to 4% for China. The rise in population levels will lead to an additional 1 billion tons of soft grain consumption either directly as food or indirectly as a feedstock for cattle.

Consequently, DB estimates that just over one third of the total growth in soft grains consumption between now and 2050 will be driven by demographics. Rising per capita incomes across the developing world will also lead to an improvement in dietary intake such that protein demand between now and 2050 will be more than double. This will be another powerful source of boosting grain demand going forward.

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The challenge will be to raise agricultural production given the constraints of land and water at the same time that urbanization rates are rising. Urbanization has been partly responsible for the steady decline in land dedicated to agricultural production globally. In fact since the 1960s, the size of agricultural land per capita globally has been cut by half. To a large degree this has been offset by a significant improvement in agricultural yields in certain parts of the world. Even so, we expect significant challenges lie ahead not least given the scarcity of water resources, particularly across Asia.

Livestock Products

Of the five broad commodity sectors, livestock is one of the smallest in terms of production, world trade and futures turnover. The United States is the world’s largest producer of beef followed by Brazil and the EU-27 countries. However, the global trade in meat products is small compared to world production. Today Brazil is the world’s leading exporter of beef. Although per capita consumption of beef and veal is low in China compared to other developed and developing countries, the country is the world’s largest producer and consumer of pork. Indeed the country’s per capita consumption of pork exceeds that of the US and Japan.

The livestock industry has had to contend with a significant increase in feedstock prices such as grains over the past few years.

Alessandro Balsotti