Trading in commodities and the future of commodity markets | Motilal Oswal

The future for commodity markets

One of the most integral aspects of the global economy are in the form of commodity markets. When investors get an inkling of what developments in these markets are driven by, they can be aware of policy frameworks which lead to economic goals in terms of poverty reduction, food security, the stability of inflation, and sustainable growth. The commodity market is not difficult to understand when you know that, like stocks, it trades in different commodities such as metals, agriculture, energy, and oil to name the popular ones.  

Understanding Concepts

The definition of a commodity is the basic raw material which is used to produce certain goods. The finished goods that any commodity is used to create are called products. You can often get confused between a commodity and a product, as the words are used interchangeably. Commodities are often termed the “building blocks” of any economy as one or the other (and most often, all) are necessary to the  lives of people. 

Commodities can include base metals like copper, lead, etc, and precious metals like silver and gold. Commodities also comprise of energy (natural gas and oil) and agriculture, like cotton, coffee, pepper, etc. The most widely traded commodities in any commodity market  are crude oil, gold, corn, etc, and the movements of prices of commodities affects commodities all over the globe. 

India and Commodity Trading

Akin to the exchanges that trade in stocks and shares, there are exchanges in India that trade in commodities too. Basically, commodity trading involves buying a commodity at a certain price and selling it when the price rises. Commodity trading takes place through online trading channels, so you can make the most of prices in real time. The National Multi-Commodity Exchange and the Multi-Commodity Exchange of India are two major exchanges that permit the trading of commodities in India. 

The Future of Commodity Markets

Research from the World Bank shows that the quantities of consumption of many commodities has risen over the past years, as there has been a corresponding growth in global demographics as well as growth in incomes. Any commodity market today, therefore, should be a fruitful one for investment. However, due to innovations in the technology sector, the relevance of commodities has seen a shift. This is largely because technological advancement has given rise to new ways of use of some raw materials, and some commodities have been substituted so that they may not be required at all. On the subject of the growth of technology, this is one of the key variables that will have an effect on commodities and commodity trading in the future. Consider the following changes in commodity markets due to extreme events and circumstances:

  • There is now more international connectivity within energy markets. For instance, the price of LNG connects with major international gas markets, taking local markets to a global platform.
  • Nowadays, markets trade in real time. For example, gas and power can now trade in just 10-minute slots in various nations, in contrast to daily slots previously. The result? Intraday trading in commodities has hit new highs. There are also advanced algorithms to deal with new structures in commodity markets and trading thereof. 
  • Due to the broad scope of environmental transformation, there are new commodities on exchanges, like biofuels.
  • Commodity markets are now more competitive than ever, and this is only going to rise with technology growth. Therefore, investing in any commodity market today is viewed as positive. 

The Future Looks Good for Commodities

You may well open a demat account and start your investment in commodities soon, but you should do your research well to know what commodities can do better than others. For example, the future holds promise in the growth of EVs, and for this, commodities like lithium, graphite and cobalt are prime requirements (for battery production). Already, analysts see spikes in prices of these commodities. While you may want to invest in an upcoming IPO, you can also explore commodities to widen your portfolio. 

 

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