Global physical and derivative trading of commodities on exchanges increased more than a third in 2007 to reach a record 1,684 million contracts according to a new edition of IFSL’s Commodities Trading report. The OTC derivatives market has also seen strong growth in 2007. The notional value outstanding of banks’ OTC commodities’ derivatives contracts grew by 27% to a record $9 trillion, largely due to an increase in OTC traded energy contracts. According to the report, in the five years up to 2007, the value of global physical exports of commodities increased by 17% while commodity derivative trading on exchanges increased by 213% and the notional value outstanding of commodity OTC derivatives by 540%.
London has benefitted from this increase in trading due to its position as the largest global centre for commodities derivatives trading after New York. The major exchanges located there accounted for 17% of global commodities’ exchange trading in 2007:- Liffe is Europe’s biggest exchange for ‘soft commodities’ with 12.8 million contracts traded in 2007.
- London Metal Exchange is the leading global exchange for non-ferrous metals with a 90% share of global trading and record turnover in 2007 - 92.9m contracts.
- ICE Futures is Europe’s biggest exchange for energy products. Turnover grew for the tenth consecutive year in 2007 to reach 138.5m contracts.
The bulk of global OTC trading in precious metals is also conducted in London through the London Bullion Market association.
Prices of many commodities have reached record highs in early 2008. This was partly due to growing demand for raw materials in emerging markets such as China and India, rising interest from investors and limited supply of some commodities. The increase in prices has attracted many investors to the commodities sector including short-term speculators such as hedge funds and more recently longer term institutional investors looking to diversify their portfolios. Funds invested in the commodities sector totalled over $400bn in the first quarter of 2008, with more than $150bn invested in commodities indices in 2007.
