After reading this article we will learn about:- 1. The Markets and Commodities 2. The International Convention on Commodities 3. Introduction to Commodities.
The Markets and Commodities:
The markets have their existence because of the products, if there are no products there will be no markets. The simplest markets also have the simplest of the products. As the markets grow and become complex so does the product groups. Opportunities do appear in the form of commodities and/or services which are commensurate with the needs of the market at a given time of its developmental cycle.
The products starting from the nature add on technology/processes become more complex and are then termed as low tech and high products. Innovation creates various applications in the products.
A market can absorb products compatible to its needs and the level of technology existing in the region. So the study of the markets tells us what kind of products that we can sell and buy from them, what types of technologies that can be sold and what in return we can expect from it.
The markets and the compatible products together form a composite area of opportunities. A trader seldom tries to change what is existing but makes the best use of what is available.
Whenever the markets have the tendency of change in technology or service which may affect the composition the product availability or may create the need for new products and/or service, the trader is always well prepared for the new opportunities because for him the markets and the products coexist as a working unit. He knows when one changes the other follows.
What we export and what we import is the index of our economic condition, in the same way it is the condition of a country also it tells us the direction towards which the country is heading and what could be done to reverse the trend towards a specific pattern.
The largest market is a country as a single unit and a trader must recognize it as such for its overall study in order to identify the type of products and services that can be offered to this market and in return what is to be expected from this market. This type of information helps the trader to make his plans of action for the specific and/or its constituents.
A country on the threshold of economic growth sees what it has got to offer to the world outside in exchange for the commodities that it wants to sustain growth and/or existence. The first and foremost item that comes for consideration is the naturally available wealth like the raw materials and minerals or similar products.
In case a country shows greater tendency towards exports of said products especially the minerals that shows the country’s dormant markets on the technological and economic side and those are the market to be explored. The return on technological sales will far outnumber the return on the purchase.
The mineral sale does not open further channels of sales but on the other hand the technological sale will open a host of other potentials for sale like the plant and the prospects of the resale of the products which these plants will be making.
The country that is dependent on mineral wealth as the major source of international trade attracts many overseas investors in mineral based industries. Their main objective would be to set up local production units and to export major part of the production back home and/or in the global markets. Take the case the African country Zambia that is rich in copper ore.
The investors were the organizations that needed the mineral or the copper cathode for home industry but as the country developed further, the local participation increased but still it remained the net exporters and lesser consumer.
Gradually the situation is changing and the country is slowly moving away from traditional items and concentrating more on the value added items which ton for ton gives them much better return.
As a result the economic condition is improving and at the same time have become the hot spot for global trade in the related products and mineral based products. The situation of the oil producing countries especially in the Middle East is also the same.
They have used the oil for dollar policy and used this wealth for the development of the domestic industry, thus creating a captive market for plant and equipment, consumer goods and basic raw materials.
On the other hand in case the country shows the tendency for export of agricultural products like food grains, dairy products, floriculture animal products etc., then all these indicate better economic condition of the country where agriculture is the main industry.
The country can utilize its agricultural products for international trade bringing them hard cash and that country will have funds to upgrade their equipment and/or to add additional systems to augment the industry/economy this cause and effect correlation will do just one thing which would be to widen the country’s business base for the international trade in the related products.
The potential of countries as buyers or supplier of related products is huge and are the center of attraction for the traders.
In the case of the agricultural industry based countries, they have the agricultural wealth for the global trade. The cumulative effect of such a surplus state has been in the strengthening of the basic sector (agriculture) and side by side the development of the related industries.
The developmental cycle of such a situation continue for some time till the peak-off stage is reached. This peak-off stage occurs when the inward demand forces the main products starts eating into the export surplus. This stage again offers a potential market for the trader in the form of new technologies and associated services towards which the country is trying diversify for its development.
The trader who is planning to enter such market segment has to plan his strategy to suit the current and future requirements of the country specific for both the inward and outward flow of business traffic.
The developing countries also offer potential markets, they are in the transitional phase between the under developed and the developed countries. There are basically two types of developing countries, one with natural resources and the other with lesser or no such resources.
Both attract new technologies and management infusion but whereas the countries with natural resources attract processing technologies and investments the others attract investment to set up industries for the global markets. Power, steel, telecommunication and information are some of the industries that commonly attract the foreign firms into their countries.
For a trader this is the heaven where he can get markets for technologies, material, management systems, financial investments and on top of all he can get basic industrial goods at competitive prices and can sell the low and high tech products in these markets.
Lastly we come to the markets of the developed countries. They are the technological leader and sell technologies. In many cases the technologies that they sell are a step behind to where they stand at the point of time because that technology had already run its cycle in their domestic and/or captive overseas operations. In the special cases the technology offered is the technology being used.
There is basically nothing wrong in this because the developing countries have differing levels of technologies. Some are moving from low level to high level where as the developed countries have already moved from high tech to super high levels.
The developed countries also offer opportunities for raw materials, basic industrial goods and components and many other groups of products production of which they consider insignificant since they can utilize their available manpower in better and more productive industries.
These countries offer high tech consumer and industrial products plant financial & other services. In a very generalized view one can say that these countries take in the consumable and give out the means of production processes and products. But from the trader’s angle both the inward and out ward flow offers areas of opportunities in these large markets.
The International Convention on Commodities:
The word commodity is a representative system of classification which makes it easier to understand the movement of products across the national borders. This classification was essential for the proper statistical data formulation of the trading nations.
The need for this classification was felt long ago when global trade started picking up especially after the formation of the United Nations in which some of the governments of the nations were represented.
As the membership steadily grew and covered most of the glob the need for such standards was felt strongly than ever. The statistical commission of the Nations finally created a standard form of classification as the Standard International Trade Classification or in short SITC.
Under SITC commodity grouping system each group is assigned a number. The single digit code number representing the broad category. These are called the sections. The double digit representing the sub groups called the divisions of the single digit groups, the three digit numbers are sub groups of the corresponding double digit sub groups.
Full SITC code as is used now a days has 3118 basic headings and published in 1986 (rev-3) by the UN Statistical Commission. Under this classification system UN publishes regularly commodity trade statistical Year Book which serves the standard source of the trade data of various commodities and products of the countries of the world.
Introduction to Commodities:
Commodities are basically the unprocessed goods which account for the bulk of the global trade. The term includes products ranging from agricultural and mineral products to crude oil. The products which are provided by nature are called the primary commodities. These are unprocessed products.
When these primary commodities are subjected to “processing” we get another set of products called the processed goods, they account for the rest 75% of the global trade. The total merchandise trade is therefore composed of the trade in commodities and trade in manufactured products or processed products.
The major primary commodity groups are the:
1. Food, beverages and tobacco.
2. Agricultural raw materials.
3. Minerals and nonferrous metals (excluding crude oil).
4. Petroleum.
These four primary commodity groups are in fact the foundation of all the processed goods. Value wise they might be low but bulk wise they are enormous. They are also the most important export item of the developing countries as against that of the developed countries.
As the nation moves from the least developed stage to developing and finally the developed stage, there is decreasing impact on the net export of the primary commodities and an upward trend for the processed goods.
The industrialized world cannot survive without the regular and guaranteed supply of the primary commodities. The production consumption and trade in primary commodities has been the hot topic of many international conferences and discussions.
There is a broad ongoing economic and political discussion on the cost & benefits of international commodity agreements. The major items normally covered are the. Cotton, Jute, Sisal, Rubber, Sugar, Coffee, Tea, Copper, Cocoa and Tin. Efforts have been made to create commodity funds and an international buffer stock for better price stabilization. But no workable solution seems in sight.
From the trader’s point of view the trade in commodities is as important as the trade in the processed goods. The first one provides him the base for further expansion of business. Each product covered under primary commodity group is the starting point for a host of secondary products.
Moreover these primary products are the essential ones for any given nation whether developing or developed. Therefore trade in them in any case becomes a matter for the nation itself.
A trader deals in a number of products depending on the market and the availability. There are traders who deal in many commodity lines and there are traders who deal in just a few of the products in a commodity group. Such traders are focusing on a limited segment of the commodity market.
This expanded line helps him to target the products for prospective global markets. Each such market has its potential of needs which keep on fluctuating. At times the needs of one product may increase and that of the others decrease due to many internal and external factors.
The watchful traders move in step with these changes with the sole purpose of keeping the continuity of his business. This closer association with the whole of the markets keeps him in contact with the overall business cycle covering major part of the industrial circle which includes the raw material, plant & machinery, technologies, man power and management etc.
Due to their flexibility of operations they know where to source and where to supply.
A trader is able to play his role in such a varied global market in so much of commodity groups because he understands the commodities in a different way than most of the other people do in this profession. For a trader there are two basic groups of products and both are facilitated for their movement from the point of production to the point of consumption by another sector called the service sector.
Thus the three main groups could be:
1. Naturally occurring products (NOP).
2. Processed Products (PP).
3. Service Sector (SS).
Naturally Occurring Products (NOP):
NOP are the gifts of nature to mankind, available in abundance either at the surface or beneath it.
The naturally occurring products can be classified into following main groups:
(i) Minerals,
(ii) Agricultural Products,
(iii) Water based Products,
(iv) Animals and Animal based Products,
(v) Fossil Fuels (Natural Gas, Crude Oil, Coal), and
(vi) Natural Sources of Renewable Energy (Solar Wind Tidal Geysers and Running Water).
(i) Minerals group:
There are over 3500 types of minerals. They occur on land and/or sea floor. They are the source of most of the metals and non-metals known to us. International trade in the minerals is a highly specialized and concentrated profession.
(ii) Agricultural products:
These are perhaps the oldest known products. Agriculture remains the primary policy objective of any form of govt.
The agricultural sector can be divided in to following main groups:
A—Crops for direct human consumption like food-grains, cereals, vegetables, fruits, nuts etc.
B—Crops that serve as feed and forge for cattle sheep horse pigs etc.
C—Raw material yielding crops like cotton hemp sisal silk etc.
D—Beverages and oil seed crops like tea coffee cocoa, the oil seeds such as coconut, mustard, til and sunflower etc.
The global trading potential in this sector is tremendous. The trading opportunity and potential exists at in-put, processing and out-put stages. At input level the demand for good seeds fertilizers and tillers exists. At-processing level the mechanized transportation and storage systems are required.
At the output level the transport and distribution systems. In addition to these requirements another long term potential is the requirement of the latest scientific knowledge the producer and consumer levels, normally this is done at the government to government levels but the govt., too need a carrier to execute their programs and this carrier is in most cases the trader of that region with firm roots.
(iii) Water based products:
These are also called the marine products.
The different types of marine products that we can get from the water bodies are:
a. The different varieties of fish including the whales,
b. Shrimps,
c. Lobsters,
d. Prawns,
e. Crabs,
f. Frog legs, and
g. Squids.
After wheat and rice perhaps the marine products are the most traded food items.
(iv) Animals and Animal based products:
The various products covered under this category are as follows:
a. Dairy products (milk butter curd ghee sweets milk powder).
b. Flesh items (mutton chicken beef pork etc.).
c. Hide and skins items (leather and its products).
d. Wool and Silk.
The various trading outlets relating to leather are briefed up as:
a. Slaughter house operation,
b. Bone meal projects,
c. Animal feed projects,
d. Tanneries,
e. Tanning chemicals,
f. Leather finishing, and
g. Flesh (mutton, beef, pork, chicken, eggs etc.).
Processing and packaging is another offshoot of these products:
a. Trade in the primary products (direct flesh-processed packed suitably for mass movement.).
b. Trade in raw materials like finished leather/hide.
c. Trade in plant and equipment in the various related fields.
d. Trade in related chemicals.
(v) Fossil Fuels:
Crude oil natural gas and coal are the main items of this group. In fact the technology of our times is wheel based and this wheel gets its energy to run by these fuels in one way or the other. Coal and Natural gas can be used as it is but crude oil needs refining to get a host of other products. This has given birth to a new industry called the refining industry.
Coal: International trade of coal is confined to either that of low ash content coal normally used for steel production. 85% of the recoverable resources of the world lie the northern hemisphere. This simply means that the coal trade has the tendency of movement towards the southern hemisphere.
The movement of coal is always in the bulk and not in any packed form so its movement is either by ships for greater volumes and by goods trains for shorter or to the just neighboring countries.
(vi) Natural Sources of Renewable Energy:
The energy contained in the solar radiation, tidal waves, wind, and the running water represent the natural sources of renewable energy. It constitutes a vast unexplored source of energy which is a gift of nature. The solar wind and wave energy has opened up a huge and potential source of pollution free and echo friendly clean energy.
The fossil fuel has limited life span. The renewable sources, (wind wave water and solar) are the unending perpetually available free of cost energy sources. The wind farms and the solar farms are but two demonstrations of alternative source of energy and they have brought with them new areas of opportunities in the form of new products and systems.
Processed Products (PP):
The total number of such products is very large and it is just not possible to mention all of them.
Some of the major groups are listed below for reference study purposes:
1. Basic metals: Ferrous and nonferrous metals, aluminum, zinc, copper, tin, nickel, manganese, magnesium, silver, gold, mercury, iron etc.
2. Chemicals and Petro Organic and inorganic chemicals products fertilizers, pesticides, plastics, soda ash, calcium carbide, explosives industrial gases, alcohol based chemicals, agro chem. etc.
3. Textiles: Cotton, synthetic and man-made fibers, blended fibers, silk, wool, made up items from these fibers.
4. Processed foods Sugars, edible oils, beverages, products of food grains.
5. Wood and forest: Paper and pulp, particle and fiber board, based products timber etc.
6. Rubber and products: Tyres & tubes, synthetic and natural rubber, belts, latex products, and various other rubber based products.
7. Soaps: Cosmetics, detergents, toiletries.
8. Paints: Varnishes, paints, dyes.
9. Drugs and pharmaceuticals: Medicines and formulations.
10. Engineering Products: Machine tools, hand tools, vehicles, components, material handling equipment, etc.
11. Telecommunication: Telephone, fax, telex etc.
12. Electrical: Cables, transmission, generation and distribution, ancillaries etc.
13. Electronics: Computers, instrumentation, entertainment electronics etc.
14. Mineral based: Cement, refectories, granite and marble, glass and ceramics.
15. Gem & jewelry: Silver, gold and diamond jewelry.
16. Petroleum products: Petrol, Diesel, kerosene, Jet fuel, Lubricants, natural gas, Liquefied Petroleum gas (LPG), Compressed Natural Gas(CNG), Liquefied Natural Gas (LNG) low sulphur Heavy oil, Naphtha.
These are the basic materials giving rise to numerous industrial and consumer products. Study of all such products is stupendous task but not for the global trader. His capability to understand and handle a number of unrelated products lies in the fact that he considers all products through certain fixed parameters and through them he can describe any product irrespective of whether it belongs chemicals or steel groups.
In general there are seven basic parameters which can identify the product as an individual identity,
(i) Name,
(ii) Specification,
(iii) Size and dimensions,
(iv) Weight,
(v) Usage,
(vi) Packing, and
(vii) Handling.
Using these seven parameters we can define any product. This is because all known products are classified according to their chemical composition, physical properties, shape, size, and usage and how they are produced and handled. This advantage is fully utilized by the traders for the conduct of their business.