Despite the fact that commodities markets have experienced a significant level of uncertainty in recent years, in 2023 alone commodity trading generated over $150 billion in terms of gross margin according to McKinsey & Company. The ability to manage and respond to changing, unpredictable market environments will be the key to success in the coming years, with those traders possessing a nuanced, in-depth understanding of the markets best placed to extract value.
Commodities markets are growing rapidly and attracting a tidal wave of new entrants, which in turn is creating the need for additional risk management and liquid offerings and building vibrant new markets. As well as increasing value pools, these new commodities markets may even help drive the energy transition via investments in emerging and new products and technologies.
The Growth of Commodity Trading Pools
Those experienced in the commodities markets, such as Domen Zavrl, recognise that minerals and metals are likely to comprise an increasing share of the value pool over the next few years. Furthermore, this sector is at the forefront of limiting climate change, with minerals and metals serving as critical inputs for low-carbon technologies like electric vehicles and wind turbines. This is being reflected in the growth of commodity trading pools, which reached almost $100 billion in 2022.
Enhanced Interconnectivity
Recently, commodities markets have become much more interconnected, while greater diversification of supply has resulted in increased exposure to short-term contracts and fewer point-to-point long-term relationships. One market particularly affected by this shift is the LNG market, with the overall number operating worldwide anticipated to exceed oil tankers by 2028. Furthermore, more ships enhances connections between global markets, like gas and power.
As new markets emerge and form, traders are likely to become active in connected areas, like logistics solutions. A comprehensive understanding of the entire value chain could enable these traders to play a more active role in mergers and acquisitions, as well as origination.
Investing in Commodities
Investors can invest in commodities in a number of different ways, such as via ETFs, options and futures contracts; they can be an effective means of diversifying a portfolio beyond traditional securities. Commodities tend to be divided into four categories: energy, metal, agricultural products, and livestock and meat, and they are often considered risky investments because events that are difficult to predict can affect their supply and demand.
While in years past commodities trading required a significant amount of money, time and expertise and was largely limited to professional traders, today there are many more options for traders wishing to participate in commodities markets.
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