Commodity trading can be a complex and dynamic field, filled with unique terminology that may seem overwhelming to newcomers. Understanding key terms is essential for navigating the world of buying and selling raw materials such as metals, oil, and agricultural products. This glossary provides clear definitions of the most important concepts, offering a solid foundation for anyone looking to get started in commodity trading. Whether you’re a beginner or simply looking to refresh your knowledge, this guide will help you better understand the language of the trade.
A
- Alumina: A white powder derived from bauxite, used as the primary material for producing aluminum.
- Arbitrage: The practice of exploiting price differences in different markets by simultaneously buying and selling an asset.
B
- Backwardation: A market condition where the current price of a commodity is higher than prices for future delivery.
- Basis: The difference between the spot price of a commodity and the price of its corresponding futures contract.
- Basis Risk: The risk that the price of a derivative will not move in line with the price of the underlying asset.
- Bauxite: The main raw material used for aluminum production.
- Benchmark (Crude): A standard reference price for crude oil, such as West Texas Intermediate (WTI) or Brent.
- Benchmark (Metals): A standard price set for metals, used to determine market prices.
- Bid/Offer: A market term referring to the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (offer) for a commodity.
- Bill of Lading (BL): A document issued by a carrier to acknowledge receipt of cargo for shipment, serving as a contract between the shipper and the carrier.
- Bunker: Fuel used by ships, often referring to the heavy fuel oil used in maritime shipping.
C
- Call Option: A financial contract that gives the buyer the right, but not the obligation, to buy an asset at a specified price within a certain time frame.
- Charter Party (CP): A contract for hiring a vessel to transport goods.
- Charterer: The company or individual that hires a vessel under a charter party agreement to transport goods.
- Collateral: Security or an asset pledged as a guarantee for a loan or financial obligation.
- Commodity: A basic good that is interchangeable with other goods of the same type, often used as inputs in production.
- Concentrate: A form of raw material with impurities removed, used in further processing.
- Contango: A market situation where the futures price of a commodity is higher than the expected future spot price.
- Copper Cathode: A highly pure form of copper used in various industrial applications.
- Counterparty: The other participant in a financial transaction.
D
- Deadweight Tonnage (DWT): The total weight a ship can carry, including cargo, fuel, and crew.
- Demurrage: A charge levied when cargo is delayed beyond the agreed-upon time for loading or unloading.
E
- Exposure: The extent to which a trader is at risk of financial loss due to market price movements.
F
- Flat Position: A situation where a trader has closed all positions and therefore has no market exposure.
- Futures Contract: A standardized agreement to buy or sell an asset at a predetermined price at a specified time in the future.
- Futures: Contracts obligating the buyer to purchase, or the seller to sell, an asset at a future date at a predetermined price.
G
- Geographic Spread: The price difference for the same commodity between different geographic locations.
H
- Hedge: A risk management strategy used to offset potential losses in one asset by taking an opposing position in a related asset.
I
- Incoterms: Internationally recognized commercial terms defining the responsibilities of buyers and sellers in international trade.
- Initial Margin: The collateral that must be deposited by a trader to open a position, serving as a guarantee against potential losses.
L
- Laytime: The amount of time allowed for the loading and unloading of cargo. If this time is exceeded, demurrage charges may apply.
- Letter of Credit (LC): A financial guarantee issued by a bank, ensuring that a seller receives payment provided certain conditions are met.
- Letter of Indemnity (LOI): A guarantee issued by one party to another to cover losses if certain contract terms are not met, often used in shipping.
- London Metals Exchange (LME): A major exchange for trading non-ferrous metals such as aluminum, copper, and zinc.
- Long Position: A market position where a trader has bought an asset with the expectation that its price will rise.
M
- Margin and Leverage: Margin refers to the collateral a trader must deposit to cover risk; leverage allows control over a large position with a smaller amount of capital.
- Mark-to-Market: An accounting practice where the value of an asset is recorded based on its current market price.
- Middle Distillates: Refined petroleum products such as diesel, jet fuel, and kerosene.
- Multimodal: A transportation method that uses multiple forms of transportation (e.g., road, rail, sea) to move goods from one place to another.
N
- Naphtha: A flammable liquid hydrocarbon mixture used primarily as a feedstock for producing chemicals.
- National Oil Company (NOC): An oil company that is owned or controlled by a national government.
O
- Offtake Agreement: A contract in which a buyer agrees to purchase the future output of a producer at a predetermined price.
- Optionality: The feature of a contract that provides the flexibility to make certain decisions in the future.
- Over-the-Counter (OTC): Financial transactions conducted directly between two parties, outside of a formal exchange.
P
- Posted Pricing: A price set by a government or company as a reference point in the market.
- Premium/Discount: The difference in price based on the quality, location, or delivery terms of a commodity compared to a benchmark or standard.
- Price Discovery: The process by which the market determines the price of a commodity based on supply and demand.
- Put Option: A financial contract that gives the buyer the right, but not the obligation, to sell an asset at a specified price within a certain time frame.
Q
- Quality Spread: The price difference between commodities of different grades or qualities.
R
- Reid Vapor Pressure (RVP): A measure of a liquid’s volatility, particularly for gasoline.
- Repurchase Agreement (Repo): A short-term borrowing agreement where one party sells an asset to another with a commitment to repurchase it at a later date.
S
- Short Position: A trading strategy where an investor sells an asset they do not currently own, with the intention of buying it back later at a lower price.
- Splitter: A processing unit that separates raw materials into different products, such as separating crude oil into naphtha and distillates.
- Spot Market: A market where financial instruments or commodities are traded for immediate delivery.
- Spot Price: The current price at which a commodity can be bought or sold for immediate delivery.
- Swap: A financial agreement in which two parties exchange cash flows or other financial instruments, often used to manage risk associated with fluctuating prices.
T
- The Steel Index (TSI): A specialist provider of price information for key steel products, based on spot market transaction data.
- Time Charter: The hiring of a vessel for a specific period, during which the charterer specifies the ship’s voyages and operations.
- Time Spread: The price difference between two futures contracts for the same commodity but with different delivery dates.
- Treatment Charge (TC) and Refining Charge (RC): Fees associated with the processing of raw materials into refined products.
V
- Variation Margin: Additional funds required to be deposited to cover potential losses in futures trading, recalculated daily.
- Vertical Integration: The combination of multiple stages of production or distribution under the control of a single company.
- Viscosity (Oil): The measure of a fluid’s resistance to flow, important in the context of transporting and refining crude oil.
- Volatility: The degree of variation in the price of a commodity over time.
- Voyage Charter: A contract for the hire of a vessel for a specific voyage, with the charterer paying freight and other costs related to the cargo’s transportation.