Commodities Commodities nIn 20th century there were three long-term growing commodity market trendes: q1906-1923 q1933-1953 q1986-1992 nAverage duration of commodity trend is 17 years. n Commodities nCommodity trend was often caused by imbalance between supply and demand and led to periodically repetitious rise and decline in commodity prices. nWhy are commodities moving in these long cycles? The answer can be very easy. qDuring period of bear market in commodities there is limited investment in industries related with commodities nthis situation led to undercapitalization in these industries and if the situation changed it is impossible to adapt in new conditions in short time period. qFor several years there is imbalance between supply and demand. The element that caused changing between demand and supply is coming for a lot of branches and in has not necessary only economic origin. As the example can be used price of oil in the 1990’s. nIn the 1998 the world was defeated by Asia crisis and there was very fast decline in oil demand. nIt subsequently led to declining in financing in refineries, oil companies and other related industries. nThe beginning of the 2000 showed how this behavior was shortsighted. qIn 2003 there was several weeks long strike in Venezuela. Venezuela was importer supplier of oil for the USA. This situation showed how current world is depended on one commodity. The gap in oil production caused decline in world supply of this commodity and then exploding in its price. Commodities nBut the latest bull markets in commodities are a bit different that all before them. qAll historical booms were caused by limited supply qbut the latest booms are powered by huge demand especially from emerging market countries e.g. China. nNow we can say that bull market in commodity began and probably will be also continued. What are the main reasons for this suggestion? nThe 1990’s was period of declining commodities market. nThe commodities were very cheaper to compare with consumer price index or price of stocks or bonds. nThis long term declining commodity market caused strong reduction of financial capacity in a commodity sectors and thus imbalance between demand and supply. Then if the demand is rising, the supply is extremely low and it will take several years that they will be aligned. nIf Asia economy will continue in growth the world demand about commodity will grow as well. Especially China transform from main exporter to main importer because of its consumptions of iron ore, copper, oil, soya etc. nAccording to historical data the price of commodities are negatively depend on price of stocks, bonds or other financial assets. If stocks reach they top the commodities are in they bottom and vice versa. It means that only with some commodity investment you get the correct portfolio diversification. qCommodities as a property assets have no credit risk. qCommodities can rise although the economy has opposite trend. n Commodities nIf we describe commodity tendencies or trends we usually use some index. It means that no commodity market can be described without this term. Indices have also information function and are possible to deduct some supreme tendencies or future development in particular market segment. Commodities n GSCI Excess Return Index nGSCI Excess Return Index nGoldman Sachs Commodity Index represents development of 24 the most important commodities nThere are several kinds of oil and gas, agricultural products and metals. nThe weight of particular commodity depends on 5 years average of world production. nIt is also reason why oil or gas has more then 70 percentage of the index value. Dow Jones AIG Commodity Index nDow Jones AIG Commodity Index nThis rollover index consists of 19 physical commodities trade on U.S. Exchange with the exception of aluminum, nickel, zinc which is traded on the London Metal Exchange. nTo assume of diversification no group of commodities may constitute more than 15 percentages or less than 2 percentages in the index. nThe weight of commodities is depended on the importance in the world economy. nThis is influenced by actual production as well as volume of trade. RICI Rogers International Commodity Index nRICI Rogers International Commodity Index nThis index was constructed to be able to reflect costs of everyday live. In this index there are included agriculture production, oil and energy. n Commodities nBecause commodities are not possible electronically deliver in contrast to stocks, bonds etc. but only physically they are traded in the form of future contract. n Futures contracts have defined day of maturity but commodity index is time unlimited and continue in its development. It is necessary to rollover future contract permanently. nGoldman Sachs Investment company rollover by following way – at the end of every month there are changed all futures contracts that are before their maturity and bought new contracts with longer time of duration. nDuring this procedure new future contract do not cost as the old one. Usually there are quoted upon (contango) or under (backwardation) level. nIn contango trap situation means that the money from last future contracts do not cover costs to purchase new contracts. Current volume of the main commodities nOil qThere has not been discovered any significant oilfield for 35 years. qThe most important oilfields called “giants” or “elephants” are 50 – 70 years old. nOil peak in U.S. – at the beginning of the 1970’s (including large oil filed in Alaska – North Slope) nOil peak in German Ocean (North Sea) in 1999 nOil peak in Saudi Arabia – the largest oilfield in the world, it is expected in several years but it is possible that this filed is also behind its peak. Current volume of the main commodities nAll oil that is still in oil fields is related with qRising costs for prospection of new fields qRising costs for delivery oil in the market nThe U.S. does not build new refinery since 1976 nNumber of U.S. oil refineries declined about 50 % since 1982 (from 321 to 149) nAt the end of 1981 in the U.S. were 4.530 drill platform that were looking for oil and gas, in 2004 there were only 1.201. Current volume of the main commodities nIn reality there is no confidence how much oil is in particulate countries. Oil countries have never agreed with independent audit of oil reserves. nOrganization of Petroleun Exporting Countries (OPEC) grants quotas about how much oil can be produce according to qsize of oil reserves and qit led that OPEC members are overestimated their oil reserves. nMembers of OPEC are following: qAlgiers, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela. Kinds of oil nOil Brent q15 kinds of oil produces from the German Ocean qIn Brent oil price is trading with oil from Europe, Africa, the Middle East that is used for consumption in west countries nWest Texas Intermediate qTrading price of North-American oil nDubai qPrice of the Middle East Oil traded in Asia-pacific area nOPEC basket nArab Light – Saudi Arabia nBonny Light – Nigeria nFateh – Arabia Emirates nIsthmus – Mexico – nonmember of OPEC nMinas – Indonesia nSaharan Blend - Algeria nTia Juana Light - Venezuela Price of oil nPrice of oil is represented by qWTI/Light Crude Oil traded in NYMEX – NY Commodity Exchange and qBrent Oil – traded in International Petroleum Exchange in London nThe most of oil is traded by direct transaction between subjects not in commodity exchanges but qPrice of directly traded oil is derivated from price of oil in stock exchange q65 % of all direct prices is determined by Brent Oil price Current volume of the main commodities nGas qThe production of gas in the North America is not able to fill a demand about gas. qAlthough there is a lot of gas there are problems with extraction of them. qCurrent gas fields are producing for several years and there is extracted all low-lying gas. qAlthough new fields were founded there is a same problem as with oil fields. Gas is more deeper and it is difficult and expensive to extract it. qIn Canada or Alaska there is not still built necessary pipe lines to ensure quick transport gas in the market. qLocal limitation in some areas that are related with environmental protection that allow produce of gas only at most 3,5 months per year. Current volume of the main commodities nMetals qNew underground mine has not been opened for 20 years. nSugar qSugar becomes energy row material because can be worked in ethanol. qMore than 60 % of world production of ethanol comes from sugar. qEthanol is used by means of transport with special engines or can be added in gasoline called gasohol. qBrazil – the largest world producer of sugar uses a half of its sugar production for drive of cars. Possibilities how take advantage of rising demand about commodities nI. Purchase securities of companies producing commodity or offering services for a commodity producer. qOr securities mutual funds that invested in commodity companies. qProblems: nSpirit and psychology in stock market. qIn the 1970’s the price of oil was rise up but some of the oil stocks stagnated, It is evident that company conditions can be good, price of commodity produced by company are rising up but stocks of this company stagnate. The reason is that stock market is often ruled by emotions. qInvestor are controlled by fear or uncertainty and do not analyze disproportion between supply and demand. qIn 2002 and 2003 was predicted low price of oil by financial analysis. They prediction was base on wrong presumption that after every significant movement is expected return in price to historical average (very often works in stock price). But they do not overlooked facts: §Demand in North America and Asia was higher than supply §Unrest in Venezuela §War in Iraq §Terrorist anxiety in Saudi Arabia qPrice of oil was in its maximum but stocks of oil companies stagnated. Possibilities how take advantage of rising demand about commodities nGovernment conditions qGovernment sets terms and condition in the area of environmental protection, waged, export and import rules, etc. §Generally, these rules have an negative impact in some companies but almost ever positive impact in price of commodity. §e.g. U.S. limited oil extraction in Alaska it will have negative impact in stocks of companies that doing business in Alaska but the price of oil rise up because of reduction of oil supply. n Possibilities how take advantage of rising demand about commodities nUnexpected events qIn 2004 high price of steel and rising demand about steel. The company U.S. Steel gets better economic results than 1 year ago but stocks of this company were lower than stocks of their competitors. qOne of the reason was companies branches in Slovakia and Serbia that announced decline in income about 38 percentages. qThe reason of this situation in Slovakia was its entrance in European Union and Slovakia was not able to comply tax holiday that promises American company years before. Possibilities how take advantage of rising demand about commodities nII. Investing in country that mines commodity qCanada and Australia are the main countries where are commodities mined. Currency exchange rates are higher in countries that export than in countries that import commodities. qIn the 1970’s 1 Canadian dollar – 1,06 USD qIn the decline of commodity market its price decline: 1 Canadian dollar – 0,6 USD. qBut also there is a problem it is not sufficient to find commodity rich country but there is important role of outside factors. nCooper qSince 2002 China is the largest world consumer of copper (lapped the U.S.) qChile is the world largest producer of copper. qDecline in economic development in China impacts in economic situation in Chile. q Possibilities how take advantage of rising demand about commodities nIII. Purchase commodity qThe simplest way how to invest in commodities is to purchase commodities. qEasy rule: if in the world there is much of commodity its price is declining, if in the world there is lack of commodity its price is rising. qThere is several possibilities how buy commodities: nIndividual account: investor open account in future commission trader that accept investor money, manage them, confirm investors trading and observe if investor has minimal sum of money in the account. qOr through a brokers that collected receive and offer instructions for futures contracts. The brokers do not manage investor’s money or trades but offer trading services. Possibilities how take advantage of rising demand about commodities qManaged account nPersonal account managed by account manager. Purchases and sells in managed account are based on manager decisions. qCommodity trader advisor nIndividual or company that advice in trading with securities, e.g. with position take (long, short), when close position, etc. qTrading with futures options nTrading in commodity market by futures options. nChicago Mercantile Exchange examined exercitation of options in years 1997-1999 and founded out that 75 % of all futures contracts were at worthless in maturity. In this situation earns seller of option that gets option premium. Possibilities how take advantage of rising demand about commodities nCommodity pool qIt is a company with limited liability where are centralized financial resources of investors interested in commodity investment. qThis fund of money is traded in commodity markets and profit is shared by commodity pool participants according to initial deposit. qIn this form of investment is very important who is pool manager. He/sha managed all money in the fund. nMutual fund qThese funds are in commodity investment uncommon and very often they do not invest only in commodities. nCommodity Real Return Strategy Funds – using derivative tools its underlying is DJ AIG Commodity Index Possibilities how take advantage of rising demand about commodities nIndex investment qInvestment in index funds is in 2/3 more successful than investment in managed funds. qThe value of investment is fluctuate according to fluctuation of the commodity basket. Political aspects investing in commodities Short history about oil nOn the 6th October 1973 Syrian and Egyptian air-fighter attracted in Israeli position in Suez Canal and Sinai peninsula. nSeveral days after attract Israel sent message that are at the point of damage. nAmerican president Nixon sent delivery of weapon by air and Israel was able to guard Sinai. n10 days after attract OPEC decided to use oil weapon, OPEC limited extraction of oil and laid on an embargo in import in the U.S. nThe price of oil rose from 2 to 11.65 USD per barrel. nA lot of American was shocked because they have no idea that oil is imported in US and especially from Arabic countries. nThe impact of this limitation was significant in Europe or Japan as well. Short history about oil nBut this OPEC limitation was not the main factor of this massive growth in oil price. nAt the beginning of the 1970’s the oil supply started to fall behind demand. American oilfields started fall down there was no technological capacity how to get oil from deeper sources and demand about oil was still rising up. Short history about oil nTo limited inflation rate Nixon imposed limitation in oil price. It had two effects: qIt discouraged investor to investing in oil extraction or looking for new oil sources qIt courage Americans to higher oil consumption nThe embargo that was apply in December was abandon in Martz because OPEC wanted also profit from this massive oil price growth. Short history about oil nIn 2006 the price of oil was 70 USD per barrel. nNowadays is price of oil about 40 – 50 USD per barrel. nIn fact the production of oil is declining for years. nIn the last 35 years was founded only one giant oilfield in Caspian sea in 1999. nIn 2006 was founded significant oilfield in Mexican gulf with reserve 3-15 billion barrels. But in the world is consumed about 85 million barrels per day. It means that it is reserve for 7 months. nIn 2007 n supply 85,5 million barrels per day n demand 84,5 million barrels per day n Short history about oil nOPEC qThere is concentrated about half of all world oil reserves. qNowadays delivered about a third of world supply. qSaudi Arabia – only member of OPEC informs about oil reserves, according own statements: nProduces 8 – 9 million barrels per day nDuring 48 hours are able to growth production of oil about 2 million barrels and extraction this number of barrels for 2 years. nTill 2015 new oilfield with production 2-3 million barrel per day till 2050. nTill now Saudi Arabia extracted 89 billion barrels (Saudi Arabia announced in 1988 that has reserves of 260 billion barrels). n Short history about oil nSituation in Saudi Arabia: qThe extraction of oil is concentrated in 5 royal oilfields that were discovered in 1940-1965 and 1951-2000. There is 90 % of all Saudi oil. This filed are before its oil peak, last oil is get thanks to water that was pumped in oil-well. Easy access to oil will be finished. q Ghawar – the largest Saudi oilfield is extracted from 90 %. qThe last estimation about Saudi oil reserves are from the 1975. qExtraction in new Saudi oil fields will be expensive – because of sands, lower pressure, etc. q Short history about oil nRussia qIn Russia there is concentrated about 6 % of all world oil resources. qRussia provide about 10 % of world consumptions. qAccording to estimation it is possible that Russia has reserves about 60 billion barrels of oil and gas sources it energy responds to 280 billion barrels of oil. qIn 2007 Russia extracted more oil than Saudi Arabia. q Short history about oil nCaspian Sea (Azerbaijan) qTwo important oil fields. nTengiz (1979) nKashagan (1999) qIn Kashagan there is about 40 billion barrels oil but only 6-9 is possible to extract. qThere is a problem with technology and building of oil well. qIn Kashagan will not start extraction till 2010 and to costs of first wave of project will be about 20 billion dollars. n Thank you for your attention