What are Carrying Markets?
Carrying markets are a type of commodity market. They are different from other markets because they deal with stuff that lasts a long time without going bad. You can keep inventory from one time to the next and not worry about it getting ruined or lost.
The things traded in carrying markets are called “nonperishable commodities”. This just means they don’t expire or rot. Metals like gold, silver, copper are good examples. Energy commodities like oil, gas, coal also fit the bill.
Why Carrying Markets Matter
Carrying markets play an important part in the world economy. Many industries depend on the raw materials traded in these markets to make their products. The prices set in carrying markets have a big impact downstream.
For investors, carrying markets provide a way to bet on the future price of key commodities. If you think demand for a certain metal or energy source will go up, you can buy contracts in a carrying market. Of course, it goes the other way too – your investment could lose value if prices fall.
How Do Carrying Markets Work?
In a typical carrying market, commodities are bought and sold using standardized contracts. Each contract specifies the amount and quality of the commodity being traded. There are also rules about where and when delivery takes place.
Most transactions in carrying markets are for future delivery dates. This is different from spot markets, where goods are exchanged immediately or “on the spot.” With a futures contract, the buyer and seller agree on a price now, but the actual stuff won’t change hands until later.
The Role of Speculators
Not everyone trading in carrying markets is looking to take possession of physical commodities. Many participants are speculators. They buy and sell contracts to profit off of price changes.
Imagine a speculator who thinks the price of copper will rise over the next 6 months due to growing demand. They could buy a 6-month futures contract for copper. If the price goes up as they predicted, they’ll sell the contract for a gain. The speculator never handles any actual copper.
Some argue that speculation distorts prices and leads to volatility in carrying markets. Others believe speculators play a vital role in providing market liquidity and helping to determine fair prices.
Famous Carrying Markets
Several carrying markets have global prominence due to their size and economic impact. A few of the heavy hitters are:
London Metal Exchange (LME)
Founded way back in 1877, the LME is the world’s largest market for metal futures and options. It’s the go-to place to trade aluminum, copper, tin, nickel, zinc, lead, and other metals. The LME is known for its open outcry trading floor where deals are made face-to-face.
New York Mercantile Exchange (NYMEX)
The NYMEX is a major market for energy products and metals. West Texas Intermediate crude oil futures contracts from the NYMEX are a benchmark for global oil prices. If you’ve ever heard someone talking about the price of oil going up or down, odds are they’re looking at WTI futures on the NYMEX.
Chicago Mercantile Exchange (CME)
The CME offers futures and options for a broad range of commodities, including metals, energy, agriculture, and more. It’s one of the oldest and most diverse carrying markets out there. Fun fact: The CME pioneered the concept of financial futures with the launch of currency contracts in 1972.
The Ups and Downs of Carrying Markets
Prices in carrying markets can swing wildly due to a variety of factors. Geopolitical events, natural disasters, changes in supply and demand – all of these and more can push prices up or drag them down.
A great example is the oil market. When a major producer like Saudi Arabia decides to crank up output, it can flood the market with supply and drive prices lower. On the flip side, conflicts in oil-rich regions can disrupt production and send prices soaring if traders fear a supply crunch.
It’s not just about supply either. Changing demand plays a huge role. When the global economy is humming along, demand for industrial metals like copper tend to rise, lifting prices. If there’s a recession and construction and manufacturing slow down, metals prices often slump.
Managing Price Risk
For companies that depend on commodities from carrying markets, price swings can be a nightmare. Airlines can see their profits evaporate if oil prices spike. Food manufacturers can get squeezed if key ingredients like wheat or corn get expensive.
To manage these price risks, many firms use futures, options, and other derivatives. By locking in prices ahead of time or hedging their bets, companies can insulate themselves from market volatility to a degree.
Of course, hedging isn’t foolproof. It can backfire if prices move in the opposite direction from what was expected. There are also costs involved in setting up and maintaining hedging programs. It’s a tricky balance.
The Future of Carrying Markets
As the world economy evolves, so do carrying markets. A major trend in recent years has been the growing influence of China. The country’s ravenous appetite for raw materials to fuel its growth has reshaped global commodity flows.
Climate change is another megatrend impacting carrying markets. As countries try to reduce carbon emissions, demand for fossil fuels could peak and decline. This would have enormous implications for oil, gas, and coal markets. At the same time, the push for clean energy is boosting demand for metals used in electric car batteries, solar panels, and wind turbines.
Technological Disruption
Technology is also shaking things up in carrying markets. More and more trading is shifting from open outcry pits to electronic platforms. Algorithmic trading and high-frequency strategies are becoming commonplace. Some worry that the “digitization” of markets could lead to flash crashes or other disruptions.
Another tech trend to watch is blockchain. The distributed ledger technology behind cryptocurrencies has the potential to streamline back-office functions in carrying markets. Smart contracts on a blockchain could one day handle everything from trade matching to delivery verification.
However, the adoption of bleeding-edge tech in centuries-old markets won’t happen overnight. There are major hurdles related to regulation, standardization, and entrenched interests.
