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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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- GN Power Mariveles Coal Plant, Philippines
- Uttam Galva Steels Limited - India
- Merrill Lynch Commodities Europe
- White Energy Company Limited
- Central Java Power - Indonesia
- Global Coal Blending Company Limited - Australia
- Indian Oil Corporation Limited
- Electricity Authority, New Zealand
- Trasteel International SA, Italy
- Coalindo Energy - Indonesia
- Mercuria Energy - Indonesia
- Africa Commodities Group - South Africa
- TeaM Sual Corporation - Philippines
- Semirara Mining Corp, Philippines
- Banpu Public Company Limited - Thailand
- PNOC Exploration Corporation - Philippines
- Altura Mining Limited, Indonesia
- Baramulti Group, Indonesia
- Samtan Co., Ltd - South Korea
- Madhucon Powers Ltd - India
- Bharathi Cement Corporation - India
- ASAPP Information Group - India
- Goldman Sachs - Singapore
- Economic Council, Georgia
- Minerals Council of Australia
- Gujarat Sidhee Cement - India
- CNBM International Corporation - China
- India Bulls Power Limited - India
- New Zealand Coal & Carbon
- Bulk Trading Sa - Switzerland
- Sree Jayajothi Cements Limited - India
- Deloitte Consulting - India
- Coastal Gujarat Power Limited - India
- Directorate Of Revenue Intelligence - India
- PetroVietnam Power Coal Import and Supply Company
- Star Paper Mills Limited - India
- Orica Australia Pty. Ltd.
- Maheswari Brothers Coal Limited - India
- Standard Chartered Bank - UAE
- Kepco SPC Power Corporation, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Posco Energy - South Korea
- South Luzon Thermal Energy Corporation
- Tata Chemicals Ltd - India
- Interocean Group of Companies - India
- Kohat Cement Company Ltd. - Pakistan
- Georgia Ports Authority, United States
- Kideco Jaya Agung - Indonesia
- Essar Steel Hazira Ltd - India
- Straits Asia Resources Limited - Singapore
- Riau Bara Harum - Indonesia
- Sakthi Sugars Limited - India
- Chettinad Cement Corporation Ltd - India
- Grasim Industreis Ltd - India
- Kartika Selabumi Mining - Indonesia
- Mintek Dendrill Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Formosa Plastics Group - Taiwan
- TNB Fuel Sdn Bhd - Malaysia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Sical Logistics Limited - India
- Australian Coal Association
- Price Waterhouse Coopers - Russia
- Indian Energy Exchange, India
- IEA Clean Coal Centre - UK
- Sinarmas Energy and Mining - Indonesia
- Bhatia International Limited - India
- Energy Development Corp, Philippines
- Edison Trading Spa - Italy
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Ministry of Mines - Canada
- McConnell Dowell - Australia
- Jindal Steel & Power Ltd - India
- Bukit Baiduri Energy - Indonesia
- Bhoruka Overseas - Indonesia
- Timah Investasi Mineral - Indoneisa
- Marubeni Corporation - India
- Pendopo Energi Batubara - Indonesia
- Mjunction Services Limited - India
- Semirara Mining and Power Corporation, Philippines
- Ambuja Cements Ltd - India
- ICICI Bank Limited - India
- Vedanta Resources Plc - India
- Eastern Energy - Thailand
- Mercator Lines Limited - India
- GMR Energy Limited - India
- Renaissance Capital - South Africa
- Singapore Mercantile Exchange
- Aboitiz Power Corporation - Philippines
- The Treasury - Australian Government
- Iligan Light & Power Inc, Philippines
- Cement Manufacturers Association - India
- Cigading International Bulk Terminal - Indonesia
- CIMB Investment Bank - Malaysia
- GVK Power & Infra Limited - India
- Petron Corporation, Philippines
- Bukit Makmur.PT - Indonesia
- Bayan Resources Tbk. - Indonesia
- Anglo American - United Kingdom
- AsiaOL BioFuels Corp., Philippines
- Global Green Power PLC Corporation, Philippines
- London Commodity Brokers - England
- Indonesian Coal Mining Association
- Oldendorff Carriers - Singapore
- Indo Tambangraya Megah - Indonesia
- Carbofer General Trading SA - India
- Attock Cement Pakistan Limited
- Ceylon Electricity Board - Sri Lanka
- Bangladesh Power Developement Board
- Wilmar Investment Holdings
- Kapuas Tunggal Persada - Indonesia
- San Jose City I Power Corp, Philippines
- Krishnapatnam Port Company Ltd. - India
- Borneo Indobara - Indonesia
- Agrawal Coal Company - India
- Vijayanagar Sugar Pvt Ltd - India
- Parliament of New Zealand
- SMG Consultants - Indonesia
- Ministry of Finance - Indonesia
- Independent Power Producers Association of India
- Barasentosa Lestari - Indonesia
- Planning Commission, India
- Binh Thuan Hamico - Vietnam
- Maharashtra Electricity Regulatory Commission - India
- Sojitz Corporation - Japan
- Metalloyd Limited - United Kingdom
- The University of Queensland
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Global Business Power Corporation, Philippines
- Eastern Coal Council - USA
- VISA Power Limited - India
- Manunggal Multi Energi - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Xindia Steels Limited - India
- SMC Global Power, Philippines
- Therma Luzon, Inc, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Malabar Cements Ltd - India
- Siam City Cement - Thailand
- Kalimantan Lumbung Energi - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Holcim Trading Pte Ltd - Singapore
- Australian Commodity Traders Exchange
- Makarim & Taira - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Romanian Commodities Exchange
- Savvy Resources Ltd - HongKong
- Globalindo Alam Lestari - Indonesia
- Medco Energi Mining Internasional
- GAC Shipping (India) Pvt Ltd
- Ind-Barath Power Infra Limited - India
- Kumho Petrochemical, South Korea
- MS Steel International - UAE
- Simpson Spence & Young - Indonesia
- Siam City Cement PLC, Thailand
- Sindya Power Generating Company Private Ltd
- Bank of Tokyo Mitsubishi UFJ Ltd
- Meenaskhi Energy Private Limited - India
- Indogreen Group - Indonesia
- International Coal Ventures Pvt Ltd - India
- IHS Mccloskey Coal Group - USA
- Intertek Mineral Services - Indonesia
- Meralco Power Generation, Philippines
- Rashtriya Ispat Nigam Limited - India
- Karbindo Abesyapradhi - Indoneisa
- PTC India Limited - India
- PowerSource Philippines DevCo
- Thai Mozambique Logistica
- European Bulk Services B.V. - Netherlands
- Tamil Nadu electricity Board
- Chamber of Mines of South Africa
- Salva Resources Pvt Ltd - India
- Orica Mining Services - Indonesia
- Energy Link Ltd, New Zealand
- Karaikal Port Pvt Ltd - India
- Central Electricity Authority - India
- Coal and Oil Company - UAE
- Kaltim Prima Coal - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Directorate General of MIneral and Coal - Indonesia
- Bhushan Steel Limited - India
- Antam Resourcindo - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Thiess Contractors Indonesia
- Alfred C Toepfer International GmbH - Germany
- Parry Sugars Refinery, India
- Sarangani Energy Corporation, Philippines
- Port Waratah Coal Services - Australia
- Aditya Birla Group - India
- Commonwealth Bank - Australia
- Vizag Seaport Private Limited - India
- OPG Power Generation Pvt Ltd - India
- Wood Mackenzie - Singapore
- Asmin Koalindo Tuhup - Indonesia
- Lanco Infratech Ltd - India
- Power Finance Corporation Ltd., India
- Miang Besar Coal Terminal - Indonesia
- LBH Netherlands Bv - Netherlands
- Larsen & Toubro Limited - India
- Heidelberg Cement - Germany
- Electricity Generating Authority of Thailand
- Videocon Industries ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Billiton Holdings Pty Ltd - Australia
- Indika Energy - Indonesia
- Rio Tinto Coal - Australia
- Dalmia Cement Bharat India
- Gujarat Mineral Development Corp Ltd - India
- Jaiprakash Power Ventures ltd
- Toyota Tsusho Corporation, Japan
- SN Aboitiz Power Inc, Philippines
- Ministry of Transport, Egypt
- Kobexindo Tractors - Indoneisa
- The State Trading Corporation of India Ltd
- Latin American Coal - Colombia
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