Commodities Trading 101: Negotiations

commodity trading

Usually a negotiation process in commodity trading starts with obtaining of enquiry.

Selling is always more difficult than buying, so you start from the sale side.

Obviously it does not preclude a situation when you have an access, either due to sheer luck or relationships build to a commodity which is either rare on the market or cheap, or has desirable specification, for which market is very liquid or which last but not least is available to you at a discount to prevailing market price.

In such cases you start from the buy side, you secure a material by:

a) taking ownership of it immediately (always risky, market can change any minute)

b) making an owner of the material to offer it to you firm for a period of time

This scenario leads us to discussion of terms/lingo that we use in physical commodities trading.

When you talk about prices or discuss the trade you can ask for:

price idea/price indication – this is not binding. Perhaps a most important point, here.

Commodities trading industry is famously an industry where multi-million dollars deals are made on the handshake. Even if these statement is slightly colored to large degree is true. Meaning a verbal agreement is taken very seriously, if specific words are used, with no wiggle room to re-negotiate later on.

When we ask for price idea, we want exactly just that. How seller or buyer sees the market, it is effectively off the top of his head gauge where the market price is at the given moment. It acts as a good estimate to let you decide if it is worthy of your time to engage in further conversation. Since maybe your price ideas are too divergent?

Indication is largely the same as a price idea. It is slightly more precise, but some traders might disagree.

I would say that price idea quoted by any given trader can differ by up to 20% from actual bid/offer price he will give you.

While indication quoted would differ by up to 5-10% depending on the commodity/state of the market.

Hence to save time I prefer to speak in indications.

Now, bids and offers are binding. If you say:

-“I bid you USD 620/MT”

and your counter party says:

-“Ok, I confirm. It’s done”

the deal is effectively done and you can not go back on it.

You use a bid when you buy.

You use an offer when you sell.

“Offer” is a word we use on daily basis in many different configurations.

In physical commodities trading however it is a very powerful term. Be careful with it!

If you say:

-“I offer at USD 570/MT”

and counter party says, something as:

-“Good, I confirm”.

The deal is done, you can not go back on it.

Maybe, you are an experienced businessman and you have seen people doing whatever they can balancing on the edge of what is legal or even crossing this boundary and you may think I live in some sort of fairy tale with this “my word is my bond” presumptions.

Usually telephone conversations in between traders are not recorded, let alone private conversations.

So as a matter of fact, usually trail of emails follows after a verbal agreement is made, reflecting what has been said.

Then as a rule contract is being send on the same day when a deal is struck.

Ideally it is also signed on the same or next subsequent days.

Traders have absolutely no qualms to chase for signature. There is no place for too much subtlety in regards of certain procedures in this business.

There is also a matter of being taken seriously in the industry. Traders which go back on their words are not being taken seriously. Since industry is small and relatively close knit and information spreads fast, if you go back on your word you can not count on a next deal with the same counter party. Counter party can also share what happened with others on the market.

Considering this peer pressure, reputable trading houses are sometimes ready to take losses instead of going back on the word given by the trader, if trader due to mistake says something he should not have said and the other party is pressing to cling to what has been said…

This is perfectly understandable in the industry.

Learn more about negotiations from the perspective of commodity trader in our course.

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