ICCH Commodities Yearbook 1990

Early in 1989 the British Government dimly realised that it faced an embarrassing dilemma. The leases held by the International Wheat Council and the International Sugar Organisation on their London premises were due to expire, but neither body could afford the likely higher rent. France, and later Belguim and Holland, began to woo the IWC and the ISO to move to their countries. Should the British Government try to keep the organisations in London? If so, how? And did it matter?

The present regulatory system of the futures industry stems directly from the passage of the Financial Services Act (1986).

‘The Brady Commission’s recommendations are sound. In periods of rapid market fluctuations, millions — indeed billions — of dollars must move quickly, sometimes within minutes, to meet margin demands. A unified clearing system would facilitate that movement and greatly simplify the monitoring of market participants. The technology for a unified clearing house exists. In fact, the International Commodities Clearing House in London acts as a clearing house for exchanges located around the world.’¹

Automation has for many years contributed to the informed and orderly operation of futures and options markets. Until recently technology was principally applied in the front office for dealer support and in the back office for the accounting of transactions and portfolio management. Traditionally the execution of trades has been conducted at exchange venues which provide a central market arena for human contact. The automation of the traditional trading floor has been a subject for debate for some time. Recent advances in technology have shifted the debate from the technical viability of automation to the method and structure of such an approach. There are few who now would argue against the inevitability of exchange automation, the arguments relate essentially to how and when.

Although options first arose from the commodities markets, it is financial market applications which have been the dominant feature of the last two decades: financial risks are more obviously multifarious in nature, and the option is now widely seen as an additional and powerful tool for the hedger. However, it would be inaccurate to characterise participants in commodities markets as unsophisticated in terms of risk management procedures. Although starting from a low base, the volumes of London’s exchange traded commodity options, particularly those relating to the energy markets, have been steadily increasing.

The difficulties encountered — in the near term in particular — in analysing the likely supply/demand balance for commodities and currencies cannot be over-emphasised and it is undoubtedly for this reason, as much as any, that techical analysis has long been popular in the commodity markets and has now become an essential tool in the FOREX markets too. A recent Bank of England survey found that by far the vast majority of chief dealers in banks use at least some chartist input. They also found, perhaps to their surprise, that technical analysis was being used as a complementary tool to fundamental analysis; when considered logically this should without doubt be the case since each form of analysis effectively represents one side of the coin. Fundamental analysis is undertaken in an attempt to establish ‘value’, whilst technical analysis rests on the examination of price alone; anyone who has been in the markets for any length of time will recognise that the two are frequently not the same.

The EEC sugar regulation covering the original six countries came into operation in July 1968. Since then the Community has doubled its membership and it became necessary to incorporate the individual procedures of new members into the original arrangement as they joined. In some cases this necessitated substantial adjustments.

The impression that history is speeding up is endorsed by the continued rapid pace of change in the futures industry. A new range of derivative financial products have been offered to the market-place in 1989 and a number of new exchanges have been inaugurated or are being planned for 1990.

After oxygen and silicon, aluminium is the earth’s third most abundant element but it is a relatively new metal. Commercial production of the metal only really became feasible this century with the development of new smelting processes. Production after the Second World War was still only around 1 million tonnes a year but supply has rapidly expanded and aluminium is now the world’s most widely used metal after steel.

Gold is very heavy, the most malleable and easily worked of metals and also one of the softest. It is a good conductor of heat and electricity and does not tarnish. It has been much prized since it was first discovered in about 4000 BC and its most important element is as a store of value and it is universally recognised as such. It has a mystique all of its own.

As the world economy has developed so trade has become increasingly important. Trade necessarily involves transport of goods and, because the sea covers around three-quarters of the Earth’s surface, transport most importantly means carriage by sea. Transport of goods in bulk is of fundamental importance and it is estimated that the turnover in the dry bulk freight market is some $20–$25 billion a year.

As a beverage, cocoa is significantly less important than tea or coffee but as the primary ingredient of chocolate it is in a class all of its own.

The grains are easily the most important food commodity in terms of production, consumption and world trade, but trade has been dominated for many years by government subsidy and control. The grains are generally divided into wheat and coarse grains, the latter including barley, corn or maize, oats, rye and sorghum. Nearly as much rice as wheat is grown but is typically consumed in the country of origin and despite a level of substi-tutability, is treated separately.

This section includes matrices of what is traded where, a list of futures and options exchanges by time zones, a list by country of each exchange and its products, and a list of ICCH members and their London market memberships.