Mastering the Commodities Markets: A step-by-step guide to the markets, products and their trading

342 Pages·2012·8.092 MB·English

by  Francesca Taylor

Mastering the
Commodities Markets

Mastering the
Commodities Markets
A step-by-step guide to the
markets, products and their trading
FRANCESCA TAYLOR
PEARSON EDUCATION LIMITED
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Harlow CM20 2JE
United Kingdom
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First published 2013 (print and electronic)
© Pearson Education Limited 2013 (print and electronic)
The right of Francesca Taylor to be identified as author of this work has been asserted by her in accordance
with the Copyright, Designs and Patents Act 1988.
Pearson Education is not responsible for the content of third-party internet sites.
ISBN: 978-0-273-76812-8 (print)
978-0-273-77011-4 (PDF)
978-0-273-77012-1 (ePub)
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About the author
Francesca Taylor
Francesca is Managing Partner of The Matrix Partnership, a Dubai-based
firm, specialising in strategic advisory and management services for com-
modities and natural resources, finance, media and international financial
training (www.matrixpartnership.biz). Francesca has been a major player in
the international derivatives markets for over 25 years and is a risk manage-
ment and derivatives specialist and author.
She has written a number of finance books: Mastering Derivatives Markets,
4th edition, was published in December 2010, and Mastering Foreign
Exchange and Currency Options is now in the 2nd edition, both published
by Financial Times Prentice Hall. In 2009 Francesca wrote the first of a
completely new series for FT Prentice Hall, entitled ‘Market Know How:
Finance & Markets’.
She commenced her career in London with BICC, the UK cable manu-
facturer, as a treasury and risk analyst advising on all aspects of currency
and interest rate hedging, where she gained her AMCT, with the UK
Association of Corporate Treasurers. She then moved into international
banking. She was one of the founders of the market-leading Financial
Engineering Group at Midland Bank, advising government agencies, major
and minor global banks and corporations, and spent time in London as a
futures broker on LIFFE.
She has also worked as an OTC derivatives broker specialising in
interest rate swaps and is the founder and ex-CEO of Taylor Associates
(International) Ltd, the London-based financial training firm, where she
personally provided derivatives, treasury and risk training to literally thou-
sands of individuals, worldwide. Clients included tax authorities, exchanges,
regulators, information and infrastructure providers, hedge funds, banks,
corporations and private individuals.
She has worked with CME and Bloomberg in NYC and ICE in Chicago to
create TV- and web-based tutorials in traded options and futures markets.
Her qualifications include:

BSc (Hons) Geology, London University
MBA, Imperial College, London
AMCT, Association of Corporate Treasurers
v

Contents
Author’s acknowledgements xi
Publisher’s acknowledgements xii
Contributors xvi
1 Commodity Fundamentals 1
Commodities are an asset class in their own right 2
Range of commodity investments 2
Market developments and global drivers 5
Commodity prices and their effect on financial markets 6
Market participants 10
How commodities differ from other assets 13
Economics of commodities: spot and forward transactions 14
Forward curves: contango and backwardation 17
Understanding the ‘basis’ 20
Commodity hedging, trading, arbitrage 21
Commodity indices 22
2 Key Commodities Derivatives 29
Background and context 30
Market fundamentals: exchange traded v. OTC derivatives markets 30
The major commodities exchanges 31
Exchange traded futures 33
Market operations 37
Exchange traded options 39
OTC commodities derivatives 44
OTC commodities options (caps) 45
OTC commodities swaps 48
Regulatory reform 51
3 Oil 57
Steven McBain, Crude Oil Trading Manager, Singapore
Background and context 58
Crude oil production 60
Crude oil consumption 61
Crude oil refining 62
vii
Contents
Geopolitics 64
OPEC 67
Definitions and key features 67
Oil reserves 73
Oil uses and applications 74
Oil pricing and price discovery 74
Freighting 75
Hedging and risk management 75
Environmental concerns 77
Future market developments 77
4 Gas 79
W ith featured section on natural gas trading, by Victoria Adams, European Natural
Gas Broker, ICAP Energy Ltd
Background and context 80
What is natural gas? 81
Gas measurements 82
Natural gas formation 82
Natural gas reserves 85
Natural gas producers 85
Liquefied natural gas (LNG) 86
Shale gas 89
Gas pricing and price discovery 94
Trading natural gas 96
‘Prompt’ and ‘curve’ markets 99
Spot trading and balancing 101
Exchange trading 105
5 Coal 107
Background and context 108
Range of coals 111
Mining and production 113
World production and reserves 115
Coal pricing and price discovery 118
Exchange traded markets 121
Trading with coal futures 124
Environmental concerns 126
Coal and carbon issues 127
6 Alternative Energy 129
Background and context 130
Measurements of electricity 132
Energy definitions 133
viii
Contents
Hydropower 134
Wind power 136
Solar power 141
Biofuels 144
Geothermal power 149
7 Carbon and Environmental Commodities 153
Andrew Pisano, Senior Manager of Marketing and Development, GreenX,
A CME Group Company, New York
Background and context 154
Economics of climate change 154
An overview of emissions trading 155
Emissions trading schemes 159
Pricing and price discovery – supply and demand 167
Hedging and trading 169
The future of emissions trading 173
8 Precious Metals 175
Jeffrey Rhodes, Global Head of Precious Metals and Chief Executive Officer,
INTL Commodities DMCC, Dubai
Introduction – a personal view 176
Background and context: the London bullion market 178
Bullion accounts 181
Supply and demand 182
Producers and consumers 185
Pricing and price discovery 187
Hedging and trading instruments 190
Technical analysis 195
9 Base Metals 203
Fabrice Tayot, Commodity and Energy Specialist for Thomson Reuters, Dubai
Background and context 204
The mining lifecycle 205
Rehabilitation and environmental concerns 208
Characteristics, supply and demand of key base metals:
Aluminium, Copper, Zinc, Nickel, Lead 209
Pricing and price discovery 220
Risk management and derivatives 228
Outlook 230
10 Rare Earth Elements 235
Background and context 236
Definition and key features 239
ix