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COMMODITIES A commodity is a raw material such as coffee, or oil.
What are commodities? The next commodity likely to hit the markets, though, will be a little less tangible: permits to emit carbon dioxide (under the Kyoto Protocol on climate change). Profiting from pollution - and the London International Petroleum Exchange is leading the field. Who owns them?A commodity is owned by either a company or a speculator. Commodities are bought and sold by the companies that produce, export/import, distribute and process them. But in the commodity exchanges of London, alongside the representatives of these companies, you will also find speculators. They buy and sell the commodities with no intention of ever using or even seeing them. CompaniesNecessity dictates where raw materials are produced. Minerals are only found in certain parts of the world, and agricultural commodities like coffee and tobacco must be grown where the climate (political as well as meteorological!) is suitable. In most cases, this means the global South. Commodity prices are unstable, and over the last few decades they have been persistently falling. Income from processing commodities, on the other hand, is much more secure. For processing, capital will go wherever it can make the highest return with the lowest risk, which is often the industrialised countries, where the industrial infrastructure is in place, the country is politically stable, and the workforce is trained.
One of the major pressures keeping commodity prices down is third world debt (see Third World Debt). SpeculatorsSpeculators gamble the markets, betting on short-term price fluctuations. The vast majority of trade that takes place in any market or exchange is speculative. The annual London Metals Exchange turnover in copper is 20m tonnes, about twice the world's copper output, and only 2-3% of cocoa futures contracts (see below) ever end up in physical delivery. If a speculator bets that a price will rise and instead it falls, he must sell quickly, thus accelerating the drop in price. In this way speculators increase the volatility of the market. Indeed, they have a vested interest in volatility, for while a producer depends on prices being high, speculators bet on price changes. Futures and Options...are insurance policies, where the supplier and the purchaser agree to a price of a commodity. The price of commodities fluctuate due to natural, political, economic and financial factors. To get around this uncertainty, the traders invented the 'commodity future'. This is a contract to deliver an agreed quantity and quality of a product at an agreed time in the future, for an agreed price. 'Options' are like futures except they are not a binding contract, but simply the option to buy or sell at an agreed price in the future; if the market price is better they can opt for that instead.
Hedging is a way of protecting against risk, tending to make investors more reckless. In practice it means that if, for example, the price of sugar drops to almost nothing, the guy selling the sugar at the commodities exchange has already hedged against it. He has an agreed price and is protected against the price slump. The sugar cane farmer in the Philippines of course is not... Where are commodities traded?Commodities are traded worldwide. In London they have their own specialised exchange markets, at 56 Leadenhall Street. 66% of developing country exports are destined for developed country markets in the USA, Europe and Japan. Much of the dealing in these products is carried out between companies by fax or 'phone in corporate offices. However their prices are set in commodity markets. Commodity dealing in the global marketplace is what sets the price that a farmer can get for his sack of, say, coffee beans. In order to trade you need expertise and financial resources (for example, a seat in the Cocoa pit at the London Commodities Exchange costs a cool £30,000), and up-to-the-minute information. Most of the commodity exchanges operate some degree of open outcry, with traders gesticulating in a pit, but supplemented by computerised information. Coloured trading jackets are worn, so staff in the booths and Exchange officials can identify traders in a crowded pit. Similarly, trading badges worn by each trader will show: his photograph; a three letter symbol for his company's name; the trading permit for the exchange; and the categories of contract that he is qualified to trade. As well as announcing their bids and offers to the pit orally, traders clarify their intentions using hand signals. Pits are subject to video surveillance throughout the trading day. All telephones on the trading floor are audio logged by the Exchange. Every day, high in the Peruvian Andes, coffee growers who have no electricity listen on solar-powered radios to reports of the days' trading in New York. They are powerless to do anything about it, and until recently did not even know it was there. Yet what goes on in distant financial centres sets the value of a crop. The price can go up or down by 10% in a day and despite the distance local prices tend to follow international fluctuations closely. Between 1989 and 1992 the price of coffee fell from $1.30 to under 50 cents a pound. The immediate effect on farmers was catastrophic, the coffee beans on the trees in Peru becoming literally worthless. Computer programmes are set to react to information while people sleep. The speed of the communications and advanced technology that operate the 24 hour exchanges and markets can have devastating effects. London Metals Exchange(www.lme.co.uk) The centre of the world's trading in base metals is the London Metals Exchange (LME). It accounts for 95% or more of the trade in the main industrially used non-ferrous metals - copper, aluminium, lead, nickel, tin and zinc - worth US$10bn per day. The LME spans the time zones by operating 24-hour trading services. It has a membership of over 100 companies, merchant banks and speculators. The LME founds at least some of its Contracts on tangible deliveries. To meet this physical aspect of trade, large stocks of metal are held in warehouses approved, but not owned, by the LME. Today there are over 400 approved warehouses and compounds in some 40 locations covering the USA, Europe and the Far East. International Petroleum Exchange(www.ipe.uk.com/) The IPE, at St Katherine's Dock, by Tower Bridge, is one of three oil futures exchanges in the world (the others are in New York and Singapore. So between them they can cover 24 hours a day; when London closes, New York opens etc). It trades over $1bn dollars worth of contracts every day, in three main energy products: Brent crude oil, gas oil and natural gas. Only the 125 registered members may trade at the IPE. These include merchant banks and speculators, who may trade for external customers, and oil and gas producers, refiners and distributors, who buy and sell for themselves. The London Commodities Exchange (www.liffe.com /liffe/news/ newslce3.htm) The London Commodity Exchange, at Commodity Quay, just across the road from the IPE, deals in Robusta coffee (which comes from Africa or Asia; Arabica, from Latin America, is traded in New York), cocoa, sugar, wheat, barley, potato and Baltic freight. It merged with LIFFE in 1996. Travelling to and from work Most City workers get in and out on public transport. Liverpool Street and Bank are the busiest hubs. Both are on the Central Line, and bring people in from areas like Notting Hill in west London, a particular favourite for young execs with disposable incomes. London Bridge station is also busy. Huge swathes of black & grey-clad commuters swarm over the bridge to the City morning and evening. Other key points are Fenchurch St and Cannon Street overland stations, as well as St. Paul's, Moorgate, Barbican, Aldgate and Mansion House tubes. The almost exclusively white-collar Waterloo & City line runs from Waterloo to Bank at key weekday times. A few with luxury flats overlooking the river may walk to work. Single flats have sprung up recently, as have hotels. With the increasing globalisation of finance, employees of banks and companies require local accommodation when they fly in to Heathrow or City Airports for a couple of days' troubleshooting. Thus local communities are torn up and relocated for the sake of providing prestigious crashpads to be used only sporadically through the year. Buses are packed at rush hour with jaded-looking workers mostly from the lower-end of the City salary spectrum, while a few cycle or roller-blade. There are precious few cyclists, apart from the countless black-clad couriers. You won't see the most powerful executives, like heads of the major financial institutions, when you're in the City. They travel by car, from a locked underground carpark at their flat, to an underground carpark at their office, or to an underground carpark at their gentleman's club. Not for them our common soil. In 1993 the Corporation of London introduced a traffic management system controlling the flow of traffic in and out of a central area of the City. It is into this traffic system that the security checkpoints and CCTV for the Ring of Steel (see Security In The City) have been incorporated. CURRENCIESWhat is a currency? A currency is a particular national form of money. A currency is the type of money a country uses. Like shares, commodities and other financial products, currencies rise and fall according to the laws of supply and demand. If lots of people want a currency, the price goes up. If lots of people sell their holding in a currency, the price goes down. The value of a currency is measured relative to other currencies - eg how many dollars or euros you can exchange a pound for. If the value of the currency is lower, it means exporters get less money (in their home currency), and imports become more expensive. Whose money is it?Money is used by companies, countries, speculators, and individuals. Like commodities, currencies are bought and sold by two groups: the companies and countries who use them, and the speculators who gamble with them. Any company involved in international trade has to change currency to operate in different countries. About $800bn changes hands every day in the international currency markets. By contrast, the trade in goods and services (ie. 'real things') is only about $20bn.
Companies hold their cash reserves in a currency they consider safe. They don't change their choice of reserve currency often, but when they do they can cause the exchange value of the currency to fall. This may lead speculators to pull out because they believe a currency is unstable, and it falls further. At some point the big players will begin to move out, often triggering a stampede, and often crippling economies, as took place in Thailand at the start of the 'Asian flu' in 1997, and Russia in 1998. A major crash can lead to the population being unable to afford basic essentials - such as food - while those working for exporters lose their jobs. So financial investors have immense power over governments, holding them to ransom with the threat of withdrawal if they disapprove of their politics (eg high social spending). If a country's currency drops too far in value, the IMF (see Third World Debt and Jargon Busters Guide) will give them a loan, on the condition that the government implements right wing, monetarist policies, usually cutting public spending on welfare. In 1976 this happened to the Labour government in Britain. They faced a run on the pound and a persistent crisis of market confidence. Eventually the government had to apply to the IMF for a massive loan to prop up the currency. The conditions attached to this loan demanded £5bn worth of public spending cuts & the sell-off of £2bn of the government's holding in BP (known as the first act of privatisation). Gavyn Davies MP later complained that "The markets wanted blood...We didn't understand that at the time, we didn't know what they wanted was humiliation." More recently Arminio Fraga, one-time Managing Director of Soros Fund Management, was appointed as President of Brazil's Central Bank. Brazil's left-wing opposition commented that "the government has let the fox in to look after the chickens". The Bank of EnglandThe Bank of England is banker to the Government. It regulates the high street banks and controls currency fulctuations. The bank has the power to raise interest rates. Every country has a central bank. Here it's the Bank of England. It holds the government's bank accounts, and those of select others, including the IMF, the World Bank, the Chancellor of the Exchequer and the Lord Mayor of London. It is the only institution allowed to print English money.
It oversees the activities of the other banks and lends to banks that get into difficulties. It lends at the base rate of interest, which influences the other banks' own interest rates, as they must neither lose money by charging too little, nor lose business to other banks by charging too much. After only a week in power in 1997, Gordon Brown handed over to the Bank the right to determine the base rate of interest. This surrendered control over the economy (and in turn over jobs, wages and prices) from elected politicians to a body which is supposedly independent of political ideology. Eddie George, the Governor of the Bank of England, made himself unpopular this year when he made the (political) judgement that unemployment in the north of England was a fair price to pay for low interest rates in the south. The bank is also responsible for regulating the currency. This is done through:
However, in reality the government or central bank have very little control over their economy. A co-ordinated effort by several central banks to protect a currency from speculative attack might raise $14bn per day, not much compared to the $800bn total circulating in the currency markets every day. Currency tradingMost currency trading takes place in (high street) banks More currency is exchanged in London than in any other city in the world. Most of this is in the banks (see High Street Banks). But like commodities, much of the trade in currencies is in futures (see Futures and Options), which allow companies to reduce their risk from currency value changes. Speculators take on this risk, and profit from it. The centre of currency futures trading is LIFFE (see LIFFE). High Street banks (aka retail banks or clearing banks)High street banks provide personal and business finance, and also trade in currencies. These are the well known names: Lloyd's, Midland (HSBC), NatWest and Barclays, Bank of Scotland, Royal Bank of Scotland and the former building societies. (Halifax is now the UK's 3rd biggest bank, and Abbey National is 5th). As well as lending and borrowing services for individuals, they also hold business accounts for companies, large and small, and give loans and overdrafts for short-term finance. Their most important role in the City, though, is in currency exchange. Companies call their bank's currency division when they need currency for importing or exporting. Most banks have a currency division which consists of rows of telephones and dealers who buy and sell large amounts of currencies for their clients, like a big, electronic Bureau de Change. There are more foreign banks in the City of London than anywhere else in the world, and their main role is currency trading. Banks lend far more money than they have deposited at them. It works something like this: the government requires banks to hold a reserve at the Bank of England, say 10% of their cash. If Brian saves £100 at Lloyds, Lloyds keeps 10% at the Bank of England, and lends the remaining £90 to Peter. Peter then spends it, giving it to Bill, who pays the £90 into his account at Midland. Midland keeps £9 and lends £81 to Bob, and it ends up in NatWest, which keeps 90p and lends out £8.1o, etc... The result is that in total, about £900 has been spent, from just £100 real money! This money did not previously exist, but it must at some stage be 'paid back', plus interest, and for loans to be repaid, more money must be borrowed. This is why banks are so keen to lend you money. The system must continually grow, whatever the costs, or debt repayments will drain all money from circulation. Under our present system, growth is not an option - it's a necessity. This means that there is far more money around than actually exists. If everyone who had savings in the bank asked for their money back at once, the money just wouldn't be there. This is known as a 'run on the bank'. The banks rely on people trusting them, a trust which may well be shaken by the millennium bug. Third World DebtMany 'developing countries' are crippled by enormous debt repayments to rich countries. These are for debts that were lent by banks many years ago, often spent by unaccountable dictatorships, and have generally already been repaid several times over due to excessive interest rates. In the 1970's, when oil prices rocketed, oil-producing nations saved their windfalls in banks, who then lent vast amounts to developing countries. Much of this money went not to the people of those countries, but into the pockets of their dictators, or into weapons or prestige projects. Rising interest rates at the end of the 1970s made many debtor nations unable to repay the loans, or even the interest on them. Old loans started to be repaid with new borrowings, and debt levels escalated. Now nine times as much money flows in debt repayments from poor countries to rich countries, as flows in the other direction in aid. This, of course, takes away from what could be spent on health, education, welfare, food subsidies etc. Under increasing pressure, in 1982 Mexico announced a suspension of debt repayments. This was "the debt crisis", a term coined to refer not to the starvation of millions of people, but to the threat of banks not getting all their money. In the end the International Monetary Fund (a lending agency owned and run by the countries of the world, but with the richest countries having the most control) stepped in to bail out the banks, as it began lending money to the debtor nations to repay their loans. The IMF(see Jargon Busters Guide) imposes conditions (structural adjustment plans) on the countries it lends to, dictating how their economies should be run, in theory to increase their chances of being able to repay the debt. It demands cuts in public spending, reduced wages, reduced imports, increased exports and opening up of markets to allow Western transnationals ("investment") in. The results are devastating: incomes of the population are slashed, while food prices rocket (due to more expensive imports, and removal of subsidies). Inevitably this means starvation, deterioration of health, and collapse of local economies. The measures fail even on their own terms. As all IMF debtors are required to increase imports, gluts are created on the commodity markets, so the prices fall, and income from exports gets lower, even though production is higher. Of course, this suits the resource-hungry developed world. The high street banks have now sold most of their third world debt. The majority is now held by countries (via eg the Bank of England), and by multilateral institutions such as the IMF. LIFFE(www.liffe.com) LIFFE deals in futures (see Futures and Options) in currencies and other financial instruments. Situated yards from Cannon Street station and the Thames, the London International Financial Futures (& Options) Exchange (LIFFE) is where much of the real action is to be found in the world of money. Here people trade financial risk: the buying and selling of futures. LIFFE has grown by over 40% a year since it was founded in 1982 and is now one of the top three futures exchanges in the world, (Chicago being the largest). They are fast losing business to Eurex (the Frankfurt-based, computerised equivalent), and are computerising and modernising so fast in response that they made a huge loss in 1998. LIFFE operates by floor-based open outcry trading, supplemented by Automated Pit Trading (APT), an electronic system that replicates the open outcry on screen. This changeover to 100% digitalised trading will sound a death knell for the frayed but brightly-coloured jacket-wearing floor traders whose frantic faces grace almost every press article on turmoil in financial markets. The EuromarketsThe Euro-Market is where Euro-Currency (currency held outside its origin country) is traded. The Euro-currency Markets sprang up after World War II and are probably one of the most important recent developments in international finance as they make it possible for borrowers and lenders to conduct their business virtually untouched by the wishes of nation states. Euro-currency Markets is a misleading name, making them sound like markets dealing in European currencies. Actually, the first Euro-currencies were Euro-dollars. These were dollars held outside of the US. Euro-currency is just any currency held outside of its country of origin. French francs held in Barclays in London are Euro-French francs, pounds held in a bank in the US are Euro-sterling etc... The advantages of holding investments in a foreign currency or in a foreign country are that the investor can bypass any regulations a government tries to impose by just moving the money elsewhere. In the late 1960's and 1970's, banking authorities tried to regulate the Euromarkets, but a there was always a country with fewer regulatory scruples than the rest, and all the financiers would just put their money there. In the end the supervisors gave up, repealed their own regulations and brought the financial markets back home. Building SocietiesBuilding Societies are involved in mortgage borrowing and savings accounts. Building societies were set up to lend money to buy property. They are owned and controlled by the holder of their mortgages (this is called mutuality), unlike banks, which are owned and controlled by shareholders. However, recently many building societies have demutualised and become banks. Much bigger profits can be made as a bank, as house mortgages by comparison are borrowed at low-interest (because the risk is low). So profiteers known as 'carpet baggers' propose demutualisation at the annual general meeting, with the offer of a large 'windfall' payout to the mortgage holders as an incentive. This is in much the same way as hostile takeovers of companies happen (see Takeovers). This began taking place during years of Tory rule and continues apace under Labour.
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Gold Panning in West-Papua for $7 a day
"In this new market ... billions can flow in or out of an economy in seconds. So powerful has this force of money become that some observers now see the hotmoney set becoming a sort of shadow world government.."
The Bank of England
