How commodity trade finance works?

commodity trade

A commodity is a raw, primary product which has not been manufactured or refined. It is a product that is traded internationally, to be used in, or converted to, mass-produced products.

Trade finance is a term that covers different kinds of loans, generally from banks, that accommodate global movement of goods from wheat to gasoline. Mostly commodity trade financing is short-term, less than a year but in pre-export financing banks offer a longer-term loan to cover the costs of production secured against the sale of future output.

Commodities Market

The concept of a commodities market originated from farmers trading wheat and corn at a centralized market. When demand for standardized contracts and buyer security became apparent in the 1800s, the idea of the commodity futures market was born and still remains the template for commodity trading to this day.

Commodity Futures Market

The invention of the futures market has allowed for the trade of a huge variety of products all around the world. There are 48 primary commodity exchanges throughout the world that deal in over 100 different commodities. Each commodity exchange specializes in a particular subset of commodities, such as the Wealth Exchange (WEX) in Nepal that specializes in gold and silver. As well as precious metals, markets exist for agricultural products, such as rubber and coffee, energy products, such as propane and ethanol, environmental commodities such as carbon emissions and new commodities, such as polypropylene.

Commodity Exchange

The trading itself is conducted in commodity exchanges, which facilitate and regulate the buying and selling of futures contracts for the various commodities. They help to promote fair trade practices by setting limits on the prices of a particular commodity on a particular day and record and display all the trades and subsequent price fluctuations for each transaction and commodity. Traders make their bids on the commodity exchange floor by means of open outcry.

Commodity Prices

Each commodity in the commodities market is sold to a minimum quantity and quality as set by the regulators of the exchange. The price that a commodity is traded for can vary greatly from day to day and is dependent on a large number of factors. Factors affecting commodity prices range from the weather to international politics, so the commodities market can become as volatile as the factors that influence it.

Commodity price indexes and commodity price charts are invaluable tools for those who choose to speculate on the market, and the ability to decipher this wealth of ever-changing information is paramount in generating success in commodity trading.

Commodity Futures

The trading itself is generally carried out by way of a commodity futures contract. A futures contract is basically an agreement reached on the commodity futures market between seller and buyer to provide a set amount of a commodity for a set price at a set time. These contracts are employed as a hedge against potential losses due to fluctuating market conditions. They also allow those who can predict market rises to generate a tidy profit by trading in these contracts, having no actual desire to take ownership of the commodities that they represent.

Commodity Trade Finance

Commodity finance is an industry that usually has structures in place in relation to lending. In the past, Commodity finance has been a specialist financing type. The reason for this known risk and execution, a lender is required to impose security over goods and sell them. It is much easier to re-sell a shipment of toys than it may be on-sell scrap metal with low margins. This commodity finance knowledge has led to experienced lenders who have a piece of knowledge and ability to re-sell the basic commodity, being the ones who are actually financing these types of commodity trades.

Nowadays financial markets are very risk adverse; if you are living in Singapore you may need the assistance to get that commodity trade financing to make big trade that may be coming your way. Commodity trade finance Singapore helps in your restructuring and support in linking you with potential trade financing partners.

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