ENE430 Commodity Trading and Transport

• Topics

  The objective of the course is to give students in-depth knowledge about the global trade of commodities, both physical and financial, with a focus on the operational real-life business decisions that affect the profitability and risk exposure of traders, consumers, suppliers, and shippers of commodities. The course is practically oriented and focuses on understanding key business terms, instruments, risks, and markets used in commodity trading. The lectures may include examples from a broad range of commodity markets, both agricultural (soybeans and grains), steel, iron ore, coal, gas, crude oil, and freight. The emphasis is on how to manage uncertain market conditions and make a calculated choice between different options relating to the sourcing, delivery and transportation of commodities. A central theme is also the interdependence between the various commodity markets and the ocean transportation market, in particular, how freight management affects the profitability and competitiveness of companies.

  The following topics will be addressed:

  • The geography of global commodity trade: Areas of production and consumption, the reasons for changing trading patterns and volumes, an overview of the different types of commodities, and the players involved.
  • The principles of trading: Fixed and floating price regimes, terms of sale, quality differences, the impact of storage, the role of exchanges and clearing houses
  • The physical shipment of commodities: ship technology and shipping terms, functioning of the freight markets, freight contracts and voyage calculations, port issues
  • Risk management: What are the risks, incl. climate-related risks? Hedging instruments and insurance, mismatch between physical and financial positions, the risk management process

• Learning outcome

  Upon course completion, the candidate:

  Knowledge

  • Can analyze the key drivers of supply and demand for the major commodity groups.
  • Has thorough knowledge of the financial markets for commodities, including price indices, exchanges and instruments.
  • Has thorough knowledge of why prices for certain commodities share particular patterns (mean reversion, seasonality, shape of the forward curve).
  • Has thorough knowledge of the physical trading of commodities such as shipping terms, ship types, port issues and the transfer of physical risk and property.
  • Can analyze the risks of commodity trading (both price risk and physical risks) and how some risks can be managed, but also appreciate why hedging instruments can be imperfect or ineffective given the complexities of these markets.

  Skills

  • Can analyze and deal critically with the strategic and operational choices faced by companies operating within the commodity space.
  • Can use relevant methods for finding data on the commodities markets and use the sources of information to structure scholarly arguments in practical decision making related to the transport and trade of commodities

  General competence

  • Can communicate with industry people about key issues, such as sustainability development, in the trade and transportation of commodities by mastering the language and terminology of the business

• Teaching

  The course is divided into bi-weekly modules, each devoted to the main topics or commodity markets covered in the course (e.g., coal, iron ore, crude oil, freight, etc.).

• Recommended prerequisites

  Basic knowledge in finance (discounting, net present value, options), microeconomics (supply functions, demand, elasticity) and statistics (probability distributions, expectation, standard deviation, variance, and regressions).

• Required prerequisites

  Basic knowledge in finance (discounting, net present value, options), microeconomics (supply functions, demand, elasticity) and statistics (probability distributions, expectation, standard deviation, variance, and regressions).

• Credit reduction due to overlap

  None.

• Compulsory Activity

  Course approval is based on a group-based 15-minute presentation on the topic "Our top trading idea" to be presented to the class. Each group should have a maximum 4 students. Not all members of the group need to present, but all must be present to answer questions from the audience.

  To ensure variety and suitability, please submit a sentence describing your intended topic on Canvas by February 24th. Topics are approved on a first-come basis.

  Dates for student presentations are March 25th and March 26th. More details on the assignment will be on Canvas shortly.

• Assessment

  There is a single grade for the course given on the basis of a group-based term paper (maximum 4 students, no exception). The exam can only be answered in English.

  The students will work on the term paper between 7 March and 31 March.

  The term paper is a large case study where your group writes a report on the transportation requirements, commodity purchasing strategy and risk management approach for a real company/asset such as a power station, refinery, steel mill or similar.

• Grading Scale

  A - F

• Computer tools

  PC: Word, PowerPoint, Excel.

• Literature

  Tentative reading list - will be updated.

  'All are available under Leganto on the course Canvas page:

  • Adland, R., Cariou, P., & Wolff, F. C. (2016). The influence of charterers and owners on bulk shipping freight rates. Transportation Research Part E: Logistics and Transportation Review, 86, 69-82.
  • Alizadeh, A., & Nomikos, N. (2009). Shipping derivatives and risk management. Springer, Chapter 6:
  • Bridge, G. and Bradshaw, M. (2017) Making a Global Gas Market: Territoriality and Production Networks in Liquefied Natural Gas, Economic Geography, 93:3,215-240, DOI: 10.1080/00130095.2017.1283212
  • He, G. and Morse, R. (2014). China’s Coal Import Behavior and Its Impacts to Global Energy Market. Globalization, Development and Security in Asia, 3, 69-85.
  • Hull, J. (2022) Options, Futures, and Other Derivatives, 11 edition, Chapter 5
  • Hull, J. (2022) Options, Futures, and Other Derivatives, 11 edition, Chapter 22
  • Pirrong, C. (2014). The economics of commodity trading firms. Singapore: Trafigura.
  • Regli, F. and Adland, R. (2019). Crude oil contango arbitrage and the floating storage decision. Transportation Research Part E: Logistics and Transportation Review, 122, 100- 118.
  • Stopford, M. (2009), Supply, Demand and Freight Rates, in Maritime Economics 3 rd edition, chapter 4
  • Stopford, M. (2009), The transport of bulk cargoes, in Maritime Economics 3 rd edition, chapter 11
  • Tutorship (2012), Introduction to shipping, ICS: London
  • Tutorship (2012), Ship operations and Management, ICS: London
  • Wårell, L. (2014). The effect of a change in pricing regime on iron ore prices. Resources Policy, 41, 16-22.