Commodities — the last 100 years and the ’80s

The futures market in metals began about a century ago because Chilean copper took about three months to get to England in the ships of those days. Traders needed to know the price they could deal at and suffer no losses that the long delay posed. So, in London, contracts were negotiated whereby a price for the copper being loaded in Chile would be agreed for Day 1, with a small down payment, but that delivery of the copper and the bulk of the payment would be made about Day 90 when the ship docked.

Although commodity contracts these days can be more complex, the basic idea of “fix the price now, pay when delivery is made at the agreed date” still remains the basis. In the U.S., the old word “fix” has acquired sensitive connotations, so Americans prefer the words “determining” or “setting” the price.

Nowadays, almost all commodities the world uses, for example, sugar, rice, cocoa, wheat, rubber, porkbellies (bacon), hogs (pork and ham), lumber, plywood, corn, frozen orange juice concentrate, eggs, cotton, palm oil (for haircream etc.), pepper and metals, acquire their basic world prices through free market registered commodity exchanges. Demand is balanced against offers every few minutes, thus “discovering” the price at that moment, published instantly to the world. Close monitoring

These transactions are closely monitored by governments to prevent manipulation or fraud in the price mechanism. Many metals sales contracts do not actually go through the exchanges but nevertheless stipulate published metal exchange prices for the agreed dates.

What has changed in the last century? That is easy to identify, but is itself extraordinarily complex.

The greatest change is in delivery. This does not apply so much to perishable commodities although refrigerated tractor trailers and boxcars have widened the delivery range of some substantially. The outstanding change is in the setting up of multiple ex-warehouse delivery points.

Taking one example, the London Metal Exchange (LME) warehouse facilities in Rotterdam assure the German Ruhr industrial complex of deliveries of copper, lead and zinc within a few hours. The LME may add Japan and the U.S. soon. The LME futures exchange also offers prompt delivery contracts. Its copper prices are particularly influential world-wide.

The advantage is that plant primary metal inventories can be “managed” down to low levels with great financial benefits, because the vendors are virtually “selling off the back of the truck.” Transportation by air

Copper has even been airlifted from Africa to Europe, but only in emergency and scarcity conditions. However, large quantities of refined gold bars are airlifted regularly from South Africa to Zurich, Switzerland. Owing to gold’s formidable weight, not much can be carried in a long-distance freight plane, so many flights have to be made. This also spreads the value risk in that the loss is less if a plane crashes. Wouldn’t that be a bonanza for the finders? Each bar of gold, about 12.5 kilos, is worth approximately $160,000(US).

For fun, just try yourself to insure an air shipment of gold bars. Large amounts of silver, platinum, rhodium, palladium, iridium etc. are now shipped by air, of course.

This all means in essence that mining-refining has to pamper the metals consumer, rather than lose a customer. The one advantage to mining is that when sudden shortages develop, prices zoom higher than normal, because consumers have virtually no inventory.

In the later 1940s, 50s and 60s, fears that world mineral resources would run out were rampant — “threatening civilization itself” — and metals rationing schemes proliferated. Now, it is the reverse. It is fashionable politics to persecute commodity producers with environmental and taxation thumbscrews.

An increasing amount of commodities is going to Pacific Rim countries for expanding industries. However, we no longer remember the severe recessions of 1975 and 1981-82. Will we experience something similar in 1989-90? Commodities would suffer. Prophecies, anyone?003

T. P. (Tom) Mohide, a former president of the Winnipeg Commodity Exchange, served as a director of mining resources with the Ontario Ministry of Natural Resources prior to his retirement in 1986.