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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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Friday, 29 May 15
COAL PRODUCTION IN THE U.S. ALMOST FLAT THIS PAST WEEK
COALspot.com – United States the second largest coal producer in the world has produced approximately totaled an estimated 16.1 million short ...
Friday, 29 May 15
SOUTH KOREAN STATE-OWNED UTILITY KOREA MIDLAND POWER INVITES BIDS FOR 780K MT OF COAL FOR H2' 15
COALspot.com: South Korean state-owned utility Korea Midland Power (KOMIPO) issued an new tender to buy total 780K Metric Tons (MT) of HCV and LCV ...
Thursday, 28 May 15
TIMEBAR FOR DEMURRAGE CLAIMS - SKULD
KNOWLEDGE TO ELEVATE
English law has traditionally had a strict approach to contractually agreed time bars between commercial parties as well ...
Wednesday, 27 May 15
MARKET INSIGHT - TIMOS PAPADIMITRIOU
Earlier in the year I looked at how the market was reacting to the prolonged fall of the price of oil. Back then it was still unclear if the fallin ...
Tuesday, 26 May 15
MINING ASSOCIATION PERHAPI PUSHES FOR 35,000 MEGAWATT ELECTRICITY PROGRAM - JG
The Indonesian Mining Professionals Association, or Perhapi, has announced its support for a 35,000-megawatt national electricity program, saying i ...
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- European Bulk Services B.V. - Netherlands
- Minerals Council of Australia
- Straits Asia Resources Limited - Singapore
- Sinarmas Energy and Mining - Indonesia
- Central Electricity Authority - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Georgia Ports Authority, United States
- Australian Commodity Traders Exchange
- IHS Mccloskey Coal Group - USA
- Videocon Industries ltd - India
- Merrill Lynch Commodities Europe
- India Bulls Power Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- TeaM Sual Corporation - Philippines
- Bayan Resources Tbk. - Indonesia
- Heidelberg Cement - Germany
- The Treasury - Australian Government
- ASAPP Information Group - India
- Bhoruka Overseas - Indonesia
- Indian Oil Corporation Limited
- Thiess Contractors Indonesia
- Commonwealth Bank - Australia
- London Commodity Brokers - England
- Kepco SPC Power Corporation, Philippines
- Vedanta Resources Plc - India
- Barasentosa Lestari - Indonesia
- Eastern Energy - Thailand
- San Jose City I Power Corp, Philippines
- Maheswari Brothers Coal Limited - India
- Attock Cement Pakistan Limited
- Renaissance Capital - South Africa
- Africa Commodities Group - South Africa
- Electricity Generating Authority of Thailand
- Jorong Barutama Greston.PT - Indonesia
- Indogreen Group - Indonesia
- Banpu Public Company Limited - Thailand
- Bukit Asam (Persero) Tbk - Indonesia
- Makarim & Taira - Indonesia
- Sakthi Sugars Limited - India
- Bangladesh Power Developement Board
- Gujarat Electricity Regulatory Commission - India
- Neyveli Lignite Corporation Ltd, - India
- Samtan Co., Ltd - South Korea
- Ministry of Finance - Indonesia
- Meenaskhi Energy Private Limited - India
- Billiton Holdings Pty Ltd - Australia
- Salva Resources Pvt Ltd - India
- Intertek Mineral Services - Indonesia
- Carbofer General Trading SA - India
- Therma Luzon, Inc, Philippines
- Xindia Steels Limited - India
- Aboitiz Power Corporation - Philippines
- International Coal Ventures Pvt Ltd - India
- Anglo American - United Kingdom
- Altura Mining Limited, Indonesia
- Australian Coal Association
- Cigading International Bulk Terminal - Indonesia
- Price Waterhouse Coopers - Russia
- Sree Jayajothi Cements Limited - India
- Mercuria Energy - Indonesia
- Simpson Spence & Young - Indonesia
- Star Paper Mills Limited - India
- Indonesian Coal Mining Association
- SN Aboitiz Power Inc, Philippines
- Mintek Dendrill Indonesia
- Toyota Tsusho Corporation, Japan
- GVK Power & Infra Limited - India
- Madhucon Powers Ltd - India
- ICICI Bank Limited - India
- CIMB Investment Bank - Malaysia
- Cement Manufacturers Association - India
- OPG Power Generation Pvt Ltd - India
- Globalindo Alam Lestari - Indonesia
- Bhushan Steel Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Metalloyd Limited - United Kingdom
- Thai Mozambique Logistica
- Bhatia International Limited - India
- Malabar Cements Ltd - India
- The University of Queensland
- Orica Australia Pty. Ltd.
- Indian Energy Exchange, India
- PowerSource Philippines DevCo
- Bukit Makmur.PT - Indonesia
- LBH Netherlands Bv - Netherlands
- Essar Steel Hazira Ltd - India
- Aditya Birla Group - India
- Bulk Trading Sa - Switzerland
- Antam Resourcindo - Indonesia
- Semirara Mining Corp, Philippines
- Baramulti Group, Indonesia
- Deloitte Consulting - India
- MS Steel International - UAE
- Rio Tinto Coal - Australia
- Trasteel International SA, Italy
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Wood Mackenzie - Singapore
- Krishnapatnam Port Company Ltd. - India
- Timah Investasi Mineral - Indoneisa
- McConnell Dowell - Australia
- Lanco Infratech Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Ind-Barath Power Infra Limited - India
- Economic Council, Georgia
- IEA Clean Coal Centre - UK
- Edison Trading Spa - Italy
- Uttam Galva Steels Limited - India
- Agrawal Coal Company - India
- Karaikal Port Pvt Ltd - India
- Port Waratah Coal Services - Australia
- GAC Shipping (India) Pvt Ltd
- Kalimantan Lumbung Energi - Indonesia
- Kumho Petrochemical, South Korea
- Interocean Group of Companies - India
- Tamil Nadu electricity Board
- Asmin Koalindo Tuhup - Indonesia
- Orica Mining Services - Indonesia
- Dalmia Cement Bharat India
- Medco Energi Mining Internasional
- Kobexindo Tractors - Indoneisa
- Ministry of Mines - Canada
- Ceylon Electricity Board - Sri Lanka
- Coal and Oil Company - UAE
- Bukit Baiduri Energy - Indonesia
- Formosa Plastics Group - Taiwan
- Maharashtra Electricity Regulatory Commission - India
- Indo Tambangraya Megah - Indonesia
- Grasim Industreis Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Sojitz Corporation - Japan
- Vijayanagar Sugar Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Chamber of Mines of South Africa
- Tata Chemicals Ltd - India
- Kideco Jaya Agung - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Pendopo Energi Batubara - Indonesia
- Manunggal Multi Energi - Indonesia
- Marubeni Corporation - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Leighton Contractors Pty Ltd - Australia
- The State Trading Corporation of India Ltd
- Goldman Sachs - Singapore
- Binh Thuan Hamico - Vietnam
- Kaltim Prima Coal - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Petrochimia International Co. Ltd.- Taiwan
- Vizag Seaport Private Limited - India
- SMG Consultants - Indonesia
- Eastern Coal Council - USA
- Latin American Coal - Colombia
- PNOC Exploration Corporation - Philippines
- Gujarat Sidhee Cement - India
- Global Business Power Corporation, Philippines
- Meralco Power Generation, Philippines
- Mjunction Services Limited - India
- Central Java Power - Indonesia
- Oldendorff Carriers - Singapore
- Global Coal Blending Company Limited - Australia
- SMC Global Power, Philippines
- Savvy Resources Ltd - HongKong
- Larsen & Toubro Limited - India
- Coalindo Energy - Indonesia
- Parliament of New Zealand
- Global Green Power PLC Corporation, Philippines
- CNBM International Corporation - China
- Siam City Cement - Thailand
- Iligan Light & Power Inc, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Mercator Lines Limited - India
- Rashtriya Ispat Nigam Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Siam City Cement PLC, Thailand
- Standard Chartered Bank - UAE
- Holcim Trading Pte Ltd - Singapore
- Wilmar Investment Holdings
- Sarangani Energy Corporation, Philippines
- GMR Energy Limited - India
- Independent Power Producers Association of India
- Jaiprakash Power Ventures ltd
- Singapore Mercantile Exchange
- Bahari Cakrawala Sebuku - Indonesia
- Electricity Authority, New Zealand
- PTC India Limited - India
- New Zealand Coal & Carbon
- Bharathi Cement Corporation - India
- Indika Energy - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Posco Energy - South Korea
- Gujarat Mineral Development Corp Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Kapuas Tunggal Persada - Indonesia
- Borneo Indobara - Indonesia
- Planning Commission, India
- Jindal Steel & Power Ltd - India
- Romanian Commodities Exchange
- Sical Logistics Limited - India
- Power Finance Corporation Ltd., India
- Kartika Selabumi Mining - Indonesia
- Energy Link Ltd, New Zealand
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Energy Development Corp, Philippines
- Directorate Of Revenue Intelligence - India
- Parry Sugars Refinery, India
- Ministry of Transport, Egypt
- Riau Bara Harum - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Ambuja Cements Ltd - India
- White Energy Company Limited
- VISA Power Limited - India
- Alfred C Toepfer International GmbH - Germany
- Kohat Cement Company Ltd. - Pakistan
- Petron Corporation, Philippines
- Coastal Gujarat Power Limited - India
- Chettinad Cement Corporation Ltd - India
- Sindya Power Generating Company Private Ltd
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