Hot Commodities: Future Commodity Trends and Role of Derivatives in ESG


Hot Commodities

Future Commodity Trends and Role of Derivatives in ESG

[October 9th, 2020]

Hi all,

It is no longer “profits versus planet” in today’s world of commodities trading. With more data-driven decision-making and a growing push towards sustainability, trading is sure to underpin waves of positive change for the economy and the environment.

Top Oil Traders Build Data Refineries to Process Waves of Info

Due to the decreasing margin for traditional commodities traders, several trading companies turn to build data refineries. These refiners are essentially used to gather and refine data points to support traders’ decision-making.

As Bloomberg News reports, there is now unlimited information on supply and demand due to internet access and general globalization. Still, trading groups such as Vitol have established a team of data scientists at the groups Rotterdam office to use clean data and the result being refined data to predict supply, demand, and price indications for their energy traders.

The widely expected data will provide traders a competitive edge compared to firms that do not gather and assimilate such data for their in-house teams. Other firms such as Mercuria Energy Group have also been hiring data scientists as their Chief Information Officer sees the future for traders having a robust tech approach with skills such as the coding key to traders’ next generation.

Oil Traders Rush to Invest Billions Into Renewables

As the world prepares for a dramatic shift towards a more diversified energy mix in the near term, the world’s largest oil traders are directing capital away from oil and into renewable energy. Marco Dunand, CEO of global commodity trading firm Mercuria was recently quoted in the Financial Times saying, “If you want to exist in 10 years’ time and don’t want to be in renewables, then I think it is going to be tough”.

With a crude oil market facing hampered demand amid the coronavirus pandemic, renewables, by comparison, have become increasingly attractive to trade houses. However, “80 percent of the world’s energy mix is fossil fuels based,” and renewables have high competition and a low rate of return on equity. Dunand believes that the world will shift toward a more realistic low-carbon future instead of a no-carbon future. Nonetheless, the idea of profits versus planet seems to be fading.


What Does the Next Generation Fuels Act Mean for Corn Growers?

As 2020 became the ‘work from home’ year, markets expect ethanol producers to lose about 8 billion dollars this year due to the unexpected coronavirus pandemic side effects. However, according to Agweb, the Next Generation Fuels act would come with many hopeful changes for the corn and ethanol industry.

Specifically, the Act establishes a gasoline standard of 98 Research Octane Number (RON). Additionally, any other octane would be required to result in “at least 30% fewer greenhouse gas emissions than unblended gasoline.” If passed, this would not only result in a need for “5 billion gallons of ethanol,” but also, this would benefit the corn market as it would require “1.7 billion bushels of corn.”

Pandemic Forces Steel Industry to Confront its Achilles Heel

A harsh reality confronts the steel industry, brought to light by the coronavirus developments, but long-coming since the 2008 financial crisis. According to the Financial Times, the hard-hit record low profits the industry has come to see is partly due to the prediction that global automobile sales will not reach pre-pandemic levels until 2025.

Political incentives for continuing to hold a strong steel production presence in countries have led to a global issue of over-production. Estimates report, the overall global capacity at “about 500m tonnes, compared with a total production of 1.87bn tonnes last year.”

An additional challenge for the industry is the EU’s publicly stated goal to become a ‘net zero’ economy by 2050. Currently, the steel industry is “globally one of the biggest sources of greenhouse gas emissions.” Therefore, the sector faces economic uncertainty and will also meet legislative pushes to create environmentally innovative solutions.

EU Steal

Endings and Beginnings – Global Supply Chain Outlook for Q4'20

The collected data from the fourth-quarter outlook of the global supply chain by S&P Global showed an “average 1.7% year-over-year improvement at the end of September, following an average 7.5% drop in July and a 28.7% slide in the second quarter.” As a result, most companies hold a positive outlook for the remainder of 2020 and into the upcoming year. Driven reportedly by Chinese exports, the US agricultural imports rose 44.3%.

Worldwide attention will be on the EU and UK regarding Brexit negotiations in the last quarter. No further agreements could result in supply chain disruptions, a loss to both in the long term. From the pandemic’s beginning, the EU has reduced medical supplies to the UK to prepare for its departure.

global supply

The Role of Derivatives in ESG

European policy-makers turn to sustainable finance as a post-pandemic recovery plan with ESG (environmental, social, and governance) at the forefront of it all. Specifically, as reported by the International Swaps and Derivatives Association, Ursula von der Leyen, the European Commission president, announced that green bonds would account for “30% of the €750 billion recovery fund.” Additionally, in the US, climate risk management shines light through a recent September report by the Commodity Futures Trading Commission. As jurisdictions worldwide turn to ESG, derivatives will play an essential role in this sustainable development.

Derivative products are vital to mitigate risk in ESG markets. To implement them successfully, standardization of documents, definitions, and operational processes will play a key role in earning the trust of a rapidly growing pool of investors.

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-Editors, Ronnie Luwero, Elena Lopez Del Carril, and Alex Meleshko