In today’s world of aggressive climate goals, awareness for the need to source commodities in a sustainable way has increased.
This infographic from Abaxx takes an introductory look at what commodity markets are, what drives revenue for commodity exchanges, and the need for a new set of contracts to deliver a more sustainable future.
The Evolution of Commodity Exchanges
From the simple gatherings of farmers to trade livestock to global contracts that trade the energy supplies of entire nations, commodity markets have evolved to deal with the changing demands of markets.
In the mid-19th century, commodity exchanges offered specialized contracts that resulted in less volume per exchange. The advent of the internet and digital platforms in the early 2000s increased the global reach of trading, increasing trading volumes.
While energy contracts dominate commodity exchanges, there are also metals and agricultural contracts that deliver the goods the world consumes. However, global economies take for granted the complex process that prices commodities, helping codify the terms of trade to facilitate a seemingly endless bounty of resources.
How Do Commodity Exchanges Work?
Exchanges facilitate discovery of the right price for commodities by providing a meeting place where buyers and sellers form a marketplace to trade and negotiate a price.
The price discovery process involves several market participants:
- The producers who supply the commodities
- The brokers who communicate with transport, shipping, and insurance to trade on behalf of clients
- The industrial end-users who are individuals or manufacturers that require or consume a commodity
The activities of these market participants generate a consensus on price and establishes a benchmark for a particular commodity. It is the future contracts that codify the terms of trades and prices, creating trust and minimizing risk between producers and end-users.
What is a Futures Contract?
Exchanges provide the market with contracts to facilitate trades and market data. It is these contracts that form the basis for the revenue of commodity exchanges.
In 2020, the four major commodity trading groups, ICE, CME, HKEX and SGX, generated $14 billion in revenue. While there are many types of contracts that cover the variety of commodities from metals to crops, typically only a handful of contracts account for the bulk of trading and revenue.
According to data compiled from the Futures Industry Association (FIA), in energy, metals and precious markets markets, the top 10 contracts account for 79.8%, 90.9% and 96% of the markets, respectively.
Markedly, this pattern makes contracts very valuable and a key driver of revenue for commodity exchanges. However, the commodity exchanges have yet to deliver specific contracts that can meet the demands for the specific materials and issues in the green energy transition.
Futures Contracts for the New Energy Era
The materials used to fuel economies are rapidly changing in order to create a more sustainable world. However, cleaner fuels such as LNG (liquified natural gas) do not have the history of established contracts and trust despite the rising demand.
Emerging markets in South Asia and India present the greatest opportunity for LNG adoption to provide clean burning fuel for a growing population.
The Abaxx Exchange is developing a LNG futures contract that will set the standard for this new market with new technology to better manage risks, execute trades, while embedding ESG concerns into global supply chains.
LNG is just the beginning—the world will need codified contracts to deliver the materials of the green energy revolution and Abaxx is leading the way.
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