How does information affect physical commodities?
Hi all, I recently spoke to a commodities trader to learn more about the industry and he said that margins were getting squeezed throughout because of information but I can't quite wrap my head around how this works.
Is the idea that customers of firms like glencore/trafi could shop around different suppliers to source their raw goods? How does it affect the physical space going forward?
Consider the age before the internet for a producer of some commodity. How could you find out the price you could get for your product? The only people buying your product are traders, or unless you want to deal with the hassle of delivering the good, then consumers of the product directly, but you will rarely get a good idea of the price you should receive. Traders of course took advantage of this information mismatch and could make pretty decent riskless spreads. In the age of easy access to price information, producers and consumers have a much better idea of what is "fair price", so traders have to generally pay a higher price and sell for a lower price than they would have made in the past just to get people to agree to work with them. Hope that helps.
Hi, thanks! In that case, how will these trading houses operate moving forward? I'm guessing they would expand upstream so that they control production, refining and then marketing it, but at that point does a trader become obsolete?
Interesting information)
The physical trading space is consolidating and many of the smaller trading shops are getting bought or pushed out of their markets. More information across the supply chain enables producers and end users to have better ideas on what they should be selling/buying for.
The main edge in the physical commodities space is your assets, a structural edge. If I have a long term contract to ship product at $5 and the spread is $7. I make $2 risk free. Variants of this are the primary business, in my experience.
Markets are always getting more efficient so if your edge is informational or experience that will always shrink over time.
In the example you have where you make 2$ from the spread between spot price and contract, doesn't that mean you initially take directional risk when you first lock in that long term contract at 5$? If I am understanding correctly that would mean the trader is going "long" because he anticipates a rise in the spot price?
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