Commodity Trading Guide

Physical commodity trading is a logistics and financing business with a price-risk overlay. Value comes from moving a commodity from where it is worth less to where it is worth more, in a form and at a time the buyer needs — not from predicting the flat price.

The three arbitrages

• Geographic — moving material between locations where price differences exceed freight and handling cost.
• Time — storing material when the forward curve pays more than the cost of carry.
• Quality — blending, refining or upgrading material so it commands a higher specification price.

From origination to settlement

A trade typically runs through origination, contract negotiation, hedging, freight and logistics execution, inspection and documentation, invoicing and settlement. Each stage carries its own risk: counterparty, operational, documentary, credit and price.

Hedging and basis

Traders normally hedge flat price on paper and keep the basis — the difference between the physical price they transact and the benchmark they hedge against. Basis is the deliberate exposure and the source of margin. Managing it well is the core commercial skill.

Finance

Physical trading is working-capital intensive. Transactional trade finance, borrowing bases, letters of credit and receivables structures fund cargoes between purchase and payment. The available credit line is often a harder constraint on volume than market opportunity.

Controls

• Position and mark-to-market reporting independent of the desk
• Counterparty credit limits and know-your-counterparty checks
• Sanctions and trade-compliance screening
• Documentary control over title, quality and quantity evidence
• Demurrage and claims management as a discipline, not an afterthought