Commodity Derivatives, 2nd Edition

CHAPTER 10Bulk Commodities

This chapter brings together several related markets, which are sometimes collectively referred to as ‘bulk commodities’. Typically, these products (e.g. coking coal and iron ore) have a unifying characteristic in that they form part of the steel supply chain. In the freight market, about 60% of Capesize vessels are used to transport iron ore.

The Singapore futures exchange (2019) claims:

• In tonnage terms, the global steel market is about 20 times larger than all other metal markets combined.
• Approximately 98% of iron ore is used in the production of steel.
• 15% of global coal consumption is used in steel making in the form of coking coal.
• China makes up about two‐thirds of seaborne iron ore demand.
• Most iron‐ore reserves are found in Australia, Brazil, and Russia.

Market participants do not always accept this definition of bulk commodities. For example, institutions that have a focus on consumers, their iron ore desks may well sit within the base metals function. But for an entity that serves producers, putting coal, iron, and freight into a single unit may make sense.

This chapter considers the markets for coal, iron ore, and freight. Steel markets are described in Section 5.4. Bulk markets can also include alumina, bauxite, and grains, but these topics are considered elsewhere.

10.1 THE BASICS OF COAL

‘Coal’, like crude oil, is a general term that is used to describe different types of a particular commodity. The World Coal Institute (WCI) defines ...