Archive for the ‘physical commodities trading’ Category

Base metals – Lead trading

Lead is not a popular base metal. It has lost a number of its applications due to disastrous impact on human health (since 2000 the lead industry has sponsored over US$3 million of independent research into the health and environmental impacts of lead, trying to somehow counter that).

Before its negative effects has been realized it has been widely used,  going back as much, as an existence of Roman Empire, due to its very good metal properties.  Lead is characterized by high density, softness, ductility (ability to be stretched – for instance into a wire)  and malleability (in simple words – material’s ability to form a thin sheet by hammering or rolling),  poor electrical conductivity compared to other metals and high corrosion resistance. Such properties made it a perfect material for use in water pipes (long withdrawn from this application).  Nowadays, lead is applied in solder and paints, however due to changing environmental legislation it is being increasingly singled out from this role.

It is still widely employed however  in shot gun pellets, fishing weights and weights to balance car tyres. Despite certain institutional efforts to cut down on these applications, as well.  One would think that henceforth lead market must be in deep decline, almost on the verge of extinction…

In fact, hardly so. Lead’s fortune is strongly connected with batteries market which is doing well. Lead-acid batteries usage for starting car’s engines is strongly established and hence lead’s fate will be binded with fate of automotive industry for years to come.  At present Lead-acid batteries are used in over billion of vehicles. Even with advancement of hybrid technology in cars, future of lead batteries is not at risk.

lead usage

Despite the fact that nickel-metal hydride (NiMH) and Lithium-ion (Li-ion) systems are up to now the storage batteries of choice,  the best-selling hybrid electric vehicles, as the Ford Fusion, all use lead-acid batteries for SLI - starting, lighting and ignition functions. The Chevrolet Volt, one of the more prominent extended-range plug-in hybrids on the market, depends on its lead-acid battery not only for SLI functions, but also for the control of high voltage contactors.


Despite the extended efforts to get rid of applications of lead by different legislative bodies, lead’s production and consumption is increasing worldwide. General industrialization growth in emerging markets does the same for lead as for other metals (or even commodities as a whole asset class I would dare to say). Total annual lead output is around 8 million tonnes; nearly half is produced from recycled scrap – making it the most recycled metal by absolute volumes. It is also not a wonder considering that 95 % of used lead batteries are eligible for recycling.  In the US more than 80% of lead in general comes from secondary production with Europe reporting over 60% market share.

The top lead producing countries are China, USA, India and Korean Republic. China, Australia and United States account for more than half of primary production. Mexico is a huge player in recycling. International Lead Association informs that lead ores are mined at a rate of more than three million tonnes a year with a market value of around US $1 billion and the world market for refined lead stands at about US $15 billion.

Lead production

lead miningGloom and doom inclined experts say at current use rates, the supply of lead is estimated to run out in 42 years. Some even say lead could run out within 18 years assuming on an extrapolation of 2% growth per year. Such assumptions are however ignored, considering increasing efficiency of recycling and continuous progress in cell technology, which makes a need for lead input scarcer. At present the global per capita stock of lead in use in society is 8 kg. The advantage of developed economies over developing ones is rather crushing 20–150 kg of lead per capita over 1–4 kg per capita.


lead recycling


The principal application of lead is for lead-acid batteries which are used in vehicles ( 60 million petrol and diesel vehicles produced worldwide each year are equipped in lead based car batteries!), and in emergency systems (e.g. hospitals) as well as in industrial batteries found in computers and fork lift trucks. Lead is also used in remote access power systems and load levelling systems.

Defence industry:  small arms ammunition and shotgun pellets – can be produced with minimal tech requirements due to low melting point that makes casting of lead easy.

Marine industry:  the balast keel of sailboats and  scuba diving weight belts – due to its high density (implying higher weight – still maybe not the best weight-to-volume ratio of many heavy metals but cost effective) and corrosion resistance.


Glass and plastics industry: as a compound

Medical industry: radiation shielding (in x ray rooms and et cetera)

Electronic industry: solder -  a fusible metal alloy used to join together metal workpieces with a melting point below that of the workpiece.

Construction industry (lead sheets are used extensively in roofing material as indeed very durable solution)

lead application




Lead is also applied in underwater high voltage power cables as sheathing material to prevent water diffusion into insulation.

Future oriented usage of leads is quiet strongly connected with renewable energies. Underwater cables that transfer electricity  from wave farms and  near seashore located  wind farms, can not do without lead.

Lead batteries are also an efficient cost effective solution for wind and solar farm energy storage.



Lead price1




I really like this 6 years span chart from International Lead and Zinc Study Group, showing the price in relation to stock levels. In most of the time we can see a clear negative correlation here.

2007 was a peak year for a number of commodities. China, the world’s largest lead producer,  reduced its exports of refined lead, tightening the world’s supply. What supported with low inventory levels made prices shoot up. It was a 5 fold increase from the low lead prices of 2003. 2007 export reduction on the Chinese side was a result of government’s interventions. China withdrawn its vat refunds for lead exports and introduced export tax. Spokesman of import and export department of Anyang Yubei Gold & Lead Co. Ltd., the country’s second largest lead smelter, said (as reported by ”Governmental controlling policies raised export lead prices higher than international prices, which significantly reduced domestic smelters’ profitability. Currently, the only exports our company does are based on our long-term contracts with clients, and some of our clients can split the increase of export cost with us”.

But it was not only government policies that were to be blamed.  Domestic Chinese smelters often rely on imported lead concentrate. In 2007 lead concentrate peak prices rendered, importing concentrate, processing and exporting refined metal unprofitable.

Which was no harm to the domestic industry really, more of simple team-playing for a benefit of overall Chinese economy. Growth in lead production could not catch up to the country’s growth in demand on the side of lead acid storage battery manufacturing industry. Boom in downstream automobiles and electric bicycle production, which required a continuous supplies of lead batteries also played its part in maintaining high lead prices.

Bonanza did not last long due to global downturn of 2008. But lead prices recuperated quiet quickly, and China was careful about controlling its refining capacity, to keep supply and demand forces in balance, while withdrawing outdated facilities from production and turning into recycling as a method to keep its hands on lead.





As we can see from June 2013 volatility normalized. Cash settlement price for lead stays in  range USD 2000-2215 per tonne.

Lead-Zinc pair

Lead 3 months price




Fast forward to fall 2014. China still deals the cards.

Base metals prices tumbled, due to Chinese pessimism, this time due to the assessment of the country’s money supply growth. Shanghai traders are bearish and their moods spills to London, where subsequent sell-off is accelerated. One of the worst hit metals is lead.

(LME) three-month lead collapses from $2,200 per tonne to $2,104. In doing so, it traversed a good part of the  $2,000-2,300 range that has defined this market for over a year.

It also blows open the differential with “sister metal” zinc to almost $200 per tonne, the widest gap seen since 2010. Lead and zinc is traded as a relative value pair and has been called in Gulf Times article as one of the London Street’s favourite past-times.

Lead and Zinc is one of the most correlated pairs among metals, and perhaps one could say, one of the most correlated pairs among all traded commodities.  Lead has a history of higher volatility than Zinc, it moves in the wider corridor. If you take a look at the one year price chart of the pair, there are multiple instances where either of the commodity has signaled the early moves of the other.

Lead outlook

Last years price range will probably remain in place. Some of major Zinc mines are told to await closure. It will affect Lead supply naturally, but since huge chunk of lead output comes from recycling activity, it should be easily counterbalanced.The LMEs warehouses are comfortably supplied. The ratio of cancelled warrants to total tonnage is one of the lowest among main LME metals. Since the beginning of 2014 China became net exporter of lead, what means that thirsty demand of domestic industry from before the crisis has been long ago satisfied.

Is there any factor that could possibly shake that stable market in the near term? Well, yes, weather.

Lead-acid batteries tend to break down in too extreme temperatures (either too cold or too hot ones)

Heavy winter could spark demand for battery replacement and hence impact demand for lead.

As for mid term and long term outlooks,  alternative energy infrastructure is still under development. Wind and solar farms are being build world wide. Emerging markets are increasingly catching up on this trend and there is still so much to do in this regard in developed economies in order to fulfill tight carbon emission reduction goals. Green energy will need wires for transfers and batteries for storage.

Automotive industry will always do well, as a whole and on the global basis and there is no replacement for lead car batteries to be seen.

Physical Trader Blog


The Advanced Lead Acid Battery Consortium, INTERFAX-CHINA, LME,  MetalBulletin,, International Lead Association, International Lead and Zinc Study Group, Gulf Times

A few thoughts on Uranium trade

uranium powderUranium trade is an obscure subsector of physical commodities trading.  Which is why it is worth to learn a little bit more about it. Particularly in face of expanding world’s energy capacity derived from nuclear power. Which according to International Energy Agency estimates is to expand by a fifth until 2030.

Naturaly most of this expansion is bound to happen on Indian and Chinese markets to help fulfill their vast energy appetites. Nevertheless the developments in US, Russia, Japan and South Korea are also bound to play their role, along with obligatory full renewal of existing plants from 70s and 80s, since such facilities usualy enjoy a lifespan of no more than 40 years.

Whether some plants will be closed or renewed depends much from public incentives and an attitude of governments towards greenhouse gases. New nuclear plant is worth two times more than coal fired power station.

Hence same as in case of renewable energies tax breaks make nuclear energy commercialy viable.

The World Nuclear Association estimates are also pretty optimistic and state that the demand for uranium for the purposes of electricity generation will increase by 70 % from 2006 to 2030.


Uranium is relatively common element of the Earth’s crust. In the past most of uranium has been mined in Australia and Canada, however with time passage new producers located in less politically stable jurisdictions began to emerge (namely Kazakhstan, Namibia, Niger, and Uzbekistan) to now be responsible for a substantial part of the market share. Kazakhstan production at present dominates the landscape with 36 % of world’s output. Canada and Australia still comes as second and third with 15 % and 12 %  market share. The producing nations influence considerable control over all buyers and hence the uranium market is considered to be a typical seller’s market.

Production (nuclear fuel cycle)

Before uranium ends up in reactors of power station, it undergoes certain amount of processing. After being mined (underground or open pit), uranium is milled into yellowcake then enriched and further destined for fuel fabrication.

Purification facilities that transform ore into yellowcake are usually located near mining sites.

Uranium is composed  of different elements and only one miniscule element – uranium-235 – can be employed as a source of power. Uranium-235 makes up only 0.7 % of all the uranium that is mined.

Therefore - firstly since  since such a tiny proportion of the ore contains usable uranium it would be uneconomic to mill it away from the mining site. Secondly the small proportion of Uranium-235 in the rock brings a need for enrichment to make it more commercially viable for use in power generation.

Facilities for enrichment are located in the countries that produce significant amounts of nuclear power. Large commercial enrichment plants operate in France, Germany, UK, USA, and Russia.

After milling,  uranium is turned into uranium oxide U3O8 –  known as yellowcake.  The vast majority of ore (99.3 %) during milling process –goes to waste. Large volumes of poor grade uranium are also left behind unless the price is high enough to process them.

As a next stage, yellowcake is turned into gas – uranium hexafluoride UF6 – and then turned to  an element again.  This brings energy concentration up to 4 %. Finally the uranium is burned into ceramic pellets and situated in fuel rods, that ends up in reactor.

Recent developments

Not long ago nuclear industry undergone a rebirth due to nuclear technology advancement and governments concern for greenhouse gases. Supported further with endless India and China energy needs. In 2007  price reached an unimaginable level of $135/lb or $ 300 a kg. The prices of shares of Uranium exploration companies also reached new heights ( more than 450 companies have listed their shares on stock exchanges in Australia, Canada, the United Kingdom and the US trying to get funding for new mining projects). It was some time since the last Uranium boom of 70′s… However to the dismal of the industry’s hopes, Fukushima tragedy put another black spot on history of atom.

Late withdrawal of major banks from physical commodities trading due to increase in regulatory requirements regarding operations on this asset class sparked changes also among Uranium traders.

In February this year Reuters informed that both Goldman Sachs and Deutsche Bank are to exit their raw uranium (yellowcake) trading desks, by putting them on sale. The banks held high level of Uranium stockpiles (reportedly larger than this of Iran) and low market price for this commodity certainly did not help.

Goldman’s nuclear trading desk,  NUFCOR International Limited was responsible for marketing the vast majority of South Africa’s uranium production. Despite the fact that Uranium has been traded by the bank mostly with nuclear plants, many has questioned such involvment in after all, very politically sensitive business.

The problem is that even if global trade in uranium is monitored by governments, intelligence agencies, and the International Atomic Energy Agency, there is no single authority responsible for supervision of the trade.

According to Reuters sources, Yellowcake – uranium concentrate powder obtained after processing of Uranium ore can be bought and sold without any significant international controls.

Reuters claims that filings with UK authorities and nuclear industry sources state the two banks’ combined stockpiles of uranium are to be worthed $400 million, and amount to 5,000 metric tonnes (5511 tons) of yellowcake. It is enough to fuel 20 standard nuclear power plants for a year, or to build 200 nuclear bombs.

The banks have not been in uranium market for long, they entered it in 2009, when the supplies have been low and fight with global warming heralded the nuclear rebirth. It was a time, when even some hedge funds were going into amassing uranium.


“The nuclear industry has been campaigning for decades to banalise uranium and make it appear like just any other commodity, but it should be subject to much stronger oversight.” Reuters source has stated. Indeed there has been several previous attempts to commoditize the uranium market. On physical uranium market, utilities, producers and investors buy and sell uranium. However Uranium can’t be moved physically. It’s controlled under an intergovernmental arrangement. Traders can only buy and sell the rights to hold the uranium, which are hold in registered warehouses. It resembles trading in base metals on the LME.

Two figures are worth of mention as far as development of Uranium trading is concerned: Oren Benton and Roy Adams. Mr. Adams pioneered uranium trading business, at major banks as Lehman and Deutshe Bank. Oren Benton in 80s and 90s spearheaded Nuexco Trading Corporation which was buying Russian uranium and selling it into Western markets.

There is also a futures market for uranium. NYMEX launched cash-settled uranium contract in 2007,  big banks as Deutshe Bank and Goldman Sachs among others provided liquidity on the exchane, becoming in fact market makers.


Involvment of financial institutions was not a surprise considering the price levels. In 2007 uranium sold for $ 140 per pound. While in 2002 pound of uranium costed only $20.


Max Uranium Price Chart - Uranium Price Per Pound
Between 2010 and 2014 price has changed by two fold, with visible downside trend.
5 Year Uranium Price Chart - Uranium Price Per Pound
Despite its inherent volatility, price of Uranium this year remained rather stable in the range of $30-35, fulfilling the expectations of traders from the first quarter
1 Year Uranium Price Chart - Uranium Price Per Pound
What was responsible for such spikes in the past? In opinion of some banks and funds were to be blamed, by amassing and holding up the commodity, in designated licensed warehouses.
However according to industry experts it was simply a matter of growing demand and unsufficient supplies on the side of producers. Experts adhered to the view that financial players have been unable to corner this market.

As a fact Uranium might be substituted if the price is high enough. It is common mechanism among commodities. Nuclear fuel can be also procured from thorium,  radioactive metal. Thorium is similar to uranium, better in regard to nuclear waste issues after the fuel is used and over 3 times more common in the earth’s crust than already widespread uranium. Thorium encapsules also more energy than uranium. Hence it can be applied as a fuel before the enrichment.  The problem remains that one can not easily feed an uranium adjusted reactor with thorium fuel. Application of thorium requires a specially adjusted technology.

Goldman’s story and NUFCOR dealings with Iran.

Goldman’s involvment in uranium came thorugh dealings with AngloGold Ashanti, which produces almost all of the yellowcake in South Africa. In 2009 Goldman acquired its uranium trading arm, called NUFCOR International Ltd, as a part of a wider deal. NUFCOR International’s goes back to 1968, when a group of private South African gold companies established the Nuclear Fuels Corporation of South Africa (NUFCOR SA) to market most of the country’s uranium, which was produced as a byproduct of their gold mining.

NUFCOR in the beggining of its operations did business with Iranian’s Shah. Company supplied Iran with low-grade uranium for its nuclear energy program. Agreement was signed for delivery of  2,400 metric tonnes of yellowcake. However only  775 metric tonnes has been shipped since Islamic Revolution began and deal has been put on hold by authorities.

The deal has been settled with approval of South African government – the uranium had not been delivered to Iran  but was sold to a New York trading company and a German electricity firm and the proceeds from the sales has been returned to Iran.

Outlook for the near future

There is a consensus among the market players that nuclear industry has seen much brighter days. This dark mood is unlikely to change in the near-term due to the departure of the investment banks and very slow pace of Japanese recovery. High hopes lie on China’s nuclear investments in the short and medium term. While people who are really bullish on uranium look at long term, that is 10-15 years perspective.

Usually there is also a divide in the forecasts, utilities as a rule voice sceptic opinions on the price development, not willing to put more fuel into the fire, while suppliers are traditionally more bullish. Drop in spot market liquidity with the closure of the uranium trading desks at Deutsche Bank and Goldman Sachs can be read in different ways. Some say its bad for the market, some say that less liquidity and hence less transparency will open up the opportunities for the well oriented traders. Also spot and mid market volatility should decrease with their exit.

As a downside we should not forget that inventories remain high and new mine projects are still coming to the already oversupplied market. Some as Chinese Husab project are not driven by market conditions but are issue of energy security for the world’s powers. On the other hand, according to experts new mines will have higher production costs, which will be passed on to customers.


Physical Trader Blog



publications of Ux Consulting
Reuters “Goldman puts ‘for sale’ sign on Iran’s old uranium supplier”
Kevin Morrison “Living in a Material World”








Online marketing in commodities industry

pr online1Commodities industry is considered as conservative and traditional in terms of doing business. Even despite the fact that it adapts quickly to changing market environment and that it was a global business before the term ”globalisation” has been coined.

Main players have dominated the landscape and are known to each other. Network of personal contacts is as important as it always has been despite the thriving LinkedIN community. In spite of ubiquity of video conferences, it is a cliche to say that nothing can replace the face-to-face meetings and handshakes at least in the early stages of deal making and particularly in frontier markets, where opportunities for a big score may still exist.

However as precise contract formulation replaced legendary “dictum meum pactum” adage, organizations in commodities business may not any more rely on word of mouth marketing. They may also not afford to be seen as backward by their peers in industries they do business with. I am confident to assume that these banal realizations are the ones to be commonly accepted among commodities community. Nonetheless when we take a closer look at the state of online marketing on the side of commodities traders and producers, one would be shocked to observe that a vast number of companies lags behind in terms of application of web based solutions and advertising, not to mention the state of the design of their webpages that very often remain remarkably crude despite the means that these very organizations have at their disposal.

One could say, fine, maybe such is a signature of this business. After all, we deal here with crude materials, hence why not to extend this “crude” way of thinking into other areas, say marketing and online presence. Or even let us go furhter and claim that after all the business enjoys a “sexy” veil of secrecy and low profile, despite its remarkable impact on global economy.

But is that really true any more? I see the other tendency. Commodities trading increasingly comes out of the shadow and straight into the spotlight. Companies which will miss the opportunity to spend time and resources to build a proper brand image and brand recognition are going to suffer in terms of attracting clients, business partners and talent. While at the same time facing the increasing scrutiny of watchdogs, medias, ngos and regulators.

I mean please kindly have a look at financial industry, at your professional peers in hedge funds, asset management companies or private equity. This sector never cared about publicity, let alone online marketing. Nowadays asset managers hire social media specialists (that is a fact and it happens a lot). I am strongly convinced that commodities sector is going to follow the suite.


The mission of ANTHRACITE PR is to deliver Public Relations services to companies involved in commodities trade, production, storage, transportation and processing by helping them to create and manage the positive and professional image.




Islamic Finance in physical commodities trade

Islamic FinanceCommodity traders increasingly turn to Islamic Finance instruments in search of attractive financing terms, while entities adherent to rules of Islamic Fianance are eager to step in considering a relative shortage of Sharia’s compliant instruments that allow for effective liquidity management. Until present Islamic Finance compliant financial institutions have been employing commodities from the London Metal Exchange to structure short-term funding transactions with much success. Nonetheless this activity seem to not fulfill their ambitions any longer.

Furthermore banks from GCC countries appear to be eager to fill the gap left by some of the European players that decided to limit their exposure to commodity business, due to liquidity constraints (particularly in USD currency terms). This is not an issue that raise concerns of GCC based banks at the moment.

Generally speaking, we could argue that much of initial growth of Islamic finance was fueled by the needs of commodity trade. Particularly to satisfy increased financing needs of oil-importing Islamic countries in 70′s. Nowadays Islamic Finance is  forecasted to reach a size of 2 trillion USD over this year. What position it as one of the most prospective areas of financial industry as a whole. For those who did not manage yet to familiarize themselves with its basic tenets, its main characteristic is that no interest rates can be charged whatsoever nonetheless mark-up’s and shares of borrower’s profit are allowed. There exists a number of standardized products to enable the financing of projects and trade. Some instruments employed are quiet complex examples of financial engineering, combining a number of Sharia’s compliant financial instruments to create a product that provides acceptable risk/return ratios.

Interesting project regarding physical commodities trade is developed within JLT Free Zone in Dubai. The Zone was brought into existence  as a strategic project of Dubai’s government in order to provide the physical market (including trade platforms and storage facilities) and financial cluster  for creation of commodities market place in Dubai.  Despite the fact that The Dubai Multi Commodities Centre is focused on trade of  Gold, Diamonds, Pearls and Tea, more typical commodities for Western based commodities traders as Oil or Copper are also exchanged.  DMCC  provides excellent facilities to track ownership of commodities in question to make sure that a factual sale of assets has occurred. It is important from the view of Islamic Finance principles adherance and from the perspective of people involved in physical trade.

Physical Trader Blog

Demurrage in commodities trade

Released by LT Bill Speaks, COMUSNAVCENT Public Affairs.Demurrage is an important term in commodities trade practice. It is a period when charterer remains in possesion of the vessel after the end of period reserved for loading or unloading of commodity (called laytime). So demurrage implies additional charges for the company who chartered the ship. It is a complex subject, that remains important to the matter of overall freight cost. Contract demurrage is directly binded with a commodity sales contract or a terminalling arrangement. In such contract party assigned, let’s say a buyer of commodity has an obligation to turn a ship (take care of loading or unloading, or both) within the stated time frame (lay time). In case of crude oil trade it is typically a period of 36 hours. In case if these time period (lay time) is exceeded demurrage is being applied. It is calculated based on the formula/rate included in the contract or as a rate specified/linked to recognized published rates. For oil trade and tankers that could be for instance AFRA, Average Freight Rate Assessment that enlists rates in Worldscale terms applicable to key tanker sizes.

This “freight billing” method  is based on the weighted average of independently owned tanker tonnage. The London Tanker Brokers’ Panel assignes rates for various sizes of tankers  for a time of six months starting each January and July. The importance of AFRA in demurrage has been underscored  by the historical legal issues, as for instance a case of Fina Supply Ltd v. Shell UK Ltd. (1991). One party here was nominated to load an oil cargo at Sullom Voe in February 1989.  Sullom Voe  is an oil and liquefied gas terminal located  on the Shetland Islands (Scotland’s jurisdiction) – picture on the right. Demurrage

Under the demurrage provisions in the charterparty, the appropriate rate of demurrage was to be determined by applying the AFRA appropriate to the size of vessel actually used and to the date of presentation of the Notice of Readiness.

Notice of Readiness is a provision that can be found typically in contracts under the parts as “loading conditions” or “lay time and demurrage”.It is an obligation of the buyer to notify the seller (or its representative)  as to when the vessel will be ready to load and when it will arrive at the port of loading.

In the case mentioned vessel’s size was in a range of AFRA which provided a figure of 101.8 per cent as a multiplier to be applied to the specified demurrage rate in the Worldscale demurrage table. That was how the issue of amount of demurrage payment has been resolved.

Second legal form of demurrage (first was called contract demurrage) is a Charter party or CP demurrage – written down in the Charter party as agreed between ship owner and charterer and generally put in as 72 hours for the voyage.
There are instances where shipper uses demurrage to his advantage and profits from the claim. Let’s say vessel takes 40 hours laytime at load port resulting from delays caused by the supplier on shore and  20 hours at unload port. If 36 hours is specified in a supply contract, the shipper may be able to claim 4 hours demurrage from the supplier but not be liable to Charter Party demurrage. That is why sometimes suppliers protect themselves by  inserting a clause limiting their liability to a portion of any CP demurrage incurred and also some suppliers do not want to cover demurrage.

Commodity traders also need to realize  that many charter party demurrage clauses have a time window (typically up to 60 days). So their claim has to be presented in writing within a certain time frame of demurrage incident.

Anoter trap, that an unsuspecting commodity trader may encounter is that companies are incorporating clauses defining payment of demurrage within a specified time after receipt of invoice and documentation. If one forgots about the payment, substantial amounts may accrue with time.

Hence the demurrage remains often a slightly ignored but important issue that can decide about the overall profitability of the transaction.

Physical Trader Blog

Oil products specifications

oil products specificationsLet’s talk about oil products specifications and its main properties. Since within the main product groups, we can encounter literally hundreds of individual products, each tailored for a specific use and adjusted to environmental concerns, price level or a combination of those. Hence the quality of a physical oil products is described in product specification or product “spec” as we say in vernacular. A product specification is a list of properties deemed as acceptable for the customer or for the regulatory bodies of the given jurisdiction.

Such properties are defined either as opposite ends of the range (namely maximum and minimum results of the given tests) or as a range itself. More general, descriptive requirements for the tests are also in use, we often talk in such instances about “clear and bright” substance with an “acceptable odour” as a part of its specification. Some of the tests are also quiet complex, require advanced equipment and try to simulate an environment under which the product will be used. Please refer below to the key properties specified for in case of different products.


Penetration (“pen test”)  measures the hardness of bitumen, low penetration indicator equals harder bitumen.

R&B softening determines the “conventional” temperature at which asphalt acquires a specific consistency (indicates bitumen properties at so called high service temperature).

Ductility being the property of bitumen that makes it possible to undergo considerable deformation or elongation, specified as the distance in cm., to which a standard sample is elongated without breaking.


Flash point, the lowest temperature at which diesel may vaporize and form an ignitable mixture. Requires an ignition source to be measured.

Cold filter plugging point (CFPP), important especially in the colder, northern hemisphere, gives an estimate for the lowest temperature at which fuel will still flow through standardized filtration system in the engine.

Cetane number, diesel uses cetane numbers as a measurement of how well it combusts, literally  cetane number  tests the period of delay of ignition after the fuel enters the combustion chamber.

Sulphur content, a range of oil products tend to contain small amounts of sulphur. Sulphur can be harmful as a corrosive and when it burns produce sulphur oxides. Health and environmental concerns made regulatory bodies to specify its maximum allowed amounts in fuels.


Octane number, specifies how much the fuel can be compressed before it spontaneously ignites.

Vapour Pressure, as discussed before (RVP).

Benzene content, regulations set limits for the amount of benzene in gasoline and for the benzene emissions number, a calculated parameter that relates gasoline composition to predicted emissions of benzene from vehicles. Benzene is also a natural constituent of oil and an elementary petrochemical and as a component of gasoline it increases its octane number. On the other hand it is carcinogenic, hence the limitations on its amount.

Lead content, most jurisdictions banned leaded fuel, lead component has been implementing to increased octane number.

Oxygenates, typically used as additives to reduce CO and soot, created during burning of fuel.

-Jet kerosine (Jet Fuel)

Flash point, as previously described

Freezing point, the lowest temperature at which the fuel is still free of solid hydrocarbon crystals that can restrict its flow.

Aromatics, inclusion of aromatics compund in jet fuels have its pluses and minuses. Aromatics when burning increase a polution level. However, at the same time aromatics compund in jet fuel cause some types of elastomers used in aircraft fuel systems to swell. Lack of aromatics in alternative jet fuels, cause industry concerns, that elastomers may shrink and lead to fuels leakage (more research is underway).

Thermal Stability, one of the most important properties since fuel also serves as a heat exchange medium in the engine and airframe of the aircraft. Jet fuel is used to get rid of heat from engine oil, hydraulic fluid, and air conditioning equipment.

Heating of the fuel speeds up gum and particulate formation, gums and particles may deposit on fuel filters and heat exchangers of the aircraft and lead to reduction of fuel flow. It all leads to operational issues of the aircraft and increase maintenance costs. Here is a link to an excellent article on this important property of jet fuel, published by Australian Department of Defence:


PONA number determines quality of Naphta. Various grades of naphtha are produced depending on PONA specification  (65/12, 70/10)  and so on. First digits signifies the minimum allowable total parafins percentage and the second a maximum allowable aromatics percentage. Pona number is directly correlated with pricing.

(No)lead, content as discussed

-Heating oil/gasoil

Pour point, the temperature at which gasoil loses its flow characteristics. High pour point generally equals  a high paraffin content.

Flash point, as discussed

Sulphur content, as discussed

Independent, third party organizations as the Institute of Petroleum (IP) and the American Society for Testing Methods (ASTM) set industry wide recognized standarts for testing methods and acceptable (or not) outcomes.

Physical Trader Blog

Oil sampling

oilIf you ever wondered how the crude oil is sampled, you would be surprised by the “crudeness” of the act. Sample is typically taken from the tank by descending the probe into the liquid, pulling the plug at the desired level (depth) and then withdrawing it. Naturally for sampling to be valid oil needs to be homogenous and proper care needs to be taken during the process. This method of sampling however may yield rather poor results in subsequent tests for reid vapor pressure (RVP), which is a way to measure how quickly fuels evaporate. It is often used in determining petroleum product blends. The higher RVP, the more quickly it evaporates. The testing for RVP depends on scarce quantities of volatile components which may be easily lost in the sampling and subsequent testing.

Line samplers, which withdraw a continuous or intermittent sample (from a loading or discharge pipe) tend to bring better results, as far as RVP is concerned.

Another problem involving oil sampling relates to proper measurement of water content in oil. Water content is not evenly distributed through the pipe, can move in slugs and hence even a method of line sampling is not always accurate. The issue with water content measurement becomes less problematic in shore tanks, where it settles well and can be measured with a measuring tape (through the dipping). The problem reappears however if we receive the cargo. Then if we would like to measure a difference in a height of water content, in order to determine its amount in the newly received cargo, then it might be difficult considering the implied miniscule differences in a typically large storage tanks. Also considering the crude oil we need to watch out for its tendency to take time to settle and to distribute unevenly across the bottom of a storage facility.

Generally for loading and unloading of crude oil the water measurement is estimated to add an additional f 0.1 per cent error but in case of some crudes it might be considerably more.

Refineries in-house labs usually furnish a certificate of quality delivered with the products. It shows the results obtained on samples of the product certified against the full range of specification tests. Samples are also subsequently taken on shore and from ship tanks during loading and discharge. Then comparison of samples is made in order to confirm that a contamination is not occurring. It is a good practice to retaine these samples in case of any future dispute. It is almost always a case that a third party inspection company is hired to measure, sample and test the quality of a product at different stages of supply chain.

As far as crude oils are concerned, solely API gravity and water content are widely specified and tested. In the next post we will discuss which properties play a key role in which oil products.

Physical Trader Blog



Oil quantity measurement


Oil measurement2

The measurement of oil and petroleum products is an extensive subject and remains integral part of every sale&purchase contract. Here I will outline a brief introduction to the subject matter.

There are three methods of oil quantity measurement in a wider use:

1.  Measurement of volume in tanks

Can take place on shore or in ship. An accurate adjustment of the volume in the tank is made against the height of liquid measured with a dip tape or automatic level gauge. Such adjustment is usually supervised by a contracted, third party surveyor (as for instance SGS) and an eye should be kept for possible inaccuracies derived from uneven position of the tank.

Furthermore, the temperature of oil in the tank needs to be precisely measured, since the volume is usually converted to a standart temperature of 60°F.

The knowledge of specific oil gravity will also be needed, firstly to convert a volume to weight, secondly it is highly relevant during a process of employing temperature conversion tables as specified by ASTM and IP. Therefore, the content of the tank  must be the same and samples must be taken at several levels.

oil measurement2. Meter measurement

Meter measurement is typically realized through turbine meters placed in a way to give a measure of volumes moving through a pipe.

When blends are made directly into the ship this mode of measuring is always used. Accuracy also counts as an advantage of this method.

However in order to maintain it through the whole process of discharge, the adjustment of turbine meters need to be confirmed regularly through the whole length of discharge by sending the loops of previously confirmed volumes. Sampling and temperature measurement with this method tend to be also more accurate and can be applied automatically.

The error margin of volume measurement in loading the oil on a ship no matter which method applied  stays usually around f0.3 per cent. Error margin on the overall operation of loading followed by discharge at the destination is usually estimated at the level of f0.4 per cent (excluding water measurement).

Weight measurement

Weigh bridges are usually used in road transportation and for rail car’s oil measurement. This method is also applied for the products sold by weight and difficult to measure by meter (for instance bitumen).

Physical Trader Blog






FOB Question. Risk transfer in Incoterms 2010 and its previous versions.

commodities fobCaveat emptor et auctor

Caveat emptor /ˌkæviːɑːt ˈɛmptɔr/ Latin for “Let the buyer beware” (from caveat, “may he beware”, the subjunctive of cavere, “to beware” + emptor, “buyer”).

Generally, caveat emptor is the contract law principle that controls the sale of real property after the date of closing, but may also apply to sales of other goods.

One of the most fundamental changes to international trade has passed us by, with hardly any notice by practitioners. Ignorance of this change imposes risks on both buyers and sellers, but it would seem that many are blissfully unaware of this and enter into international sales contracts in this state of ignorance.

I refer to the parts of Incoterms 2010 involving transport of goods by sea. In all previous versions of Incoterms the defining characteristic of the terms used for seafreight, such as FOB, involved the passing of risk at the ship’s rail. This also delineated who would pay the costs involved. When the ICC first introduced this term, they were merely codifying a practice already employed for centuries past, with slight variations in different parts ofthe world. This accepted historical practice also formed the statutory basis for its definition and further interpretation in law by reference to leading legal cases over the centuries.

Incoterms 2010 well and truly overturns this proverbial applecart, whereby the latest definition alters the location of risk and payment for FOB and other seafreight terms. Whereas there is ample legal reference and precedent to pre-2010 Incoterms, the latest version, as far as I know, has yet to be tested in court.

The main risk for international traders, as intimated earlier, lies in ignorance and the all too common error in referring to terms such as FOB without any point of reference such as Incoterms 2000 or Incoterms 2010. If a contract containing a reference to FOB without mention of Incoterms etc, comes under legal scrutiny, how is a judge to determine the intention of the contracting parties, without such reference ? Similarly, if, as often happens, the term used is “FOB Incoterms” or similar, the judge is left with the unenviable task of determining which version applies. As there is now a fundamental difference between Incoterms 2010 and previous versions, this task cannot be taken lightly. Again, due to ignorance, many people assume that the latest version of Incoterms automatically applies, but this is, of course, fallacy, as is the assumption that previous versions of Incoterms cannot be used.

For Incoterms, like insurance, many people do not pay too much heed to the details, until put to the test by litigation etc, by which time it is too late to rectify any errors. If you consider yourself a professional international trader, are you fully aware of the implications of the latest version of Incoterms and have you incorporated this into your standard terms and conditions ?

If the above is true for international contracts, it follows that it is also true for drafting Proforma Invoices and Letters of Credit and is one of the most common errors I find when advising LC clients.


Laurence Bacon

Mr. Bacon is a former Director of the National Committee of the International Chamber of Commerce (ICC), founder of the Irish Committee on Banking Techniques, co-founder of the Irish Committee on Customs & Trade and a member of the UCP Consulting Group which worked on the revision of the rules relating to LC’s (UCP 600). Mr. Bacon has over 30 years experience in import/export.

He shares his vast experience providing consulting services. For more please visit

East-West LPG arbitrage is closed with the exception of the USG.

I note that Saudi Aramco’s biggest competitor in the LPG market is now freight with Baltic VLGC spot rate is assessed at $128/mt while Japan/MEG LP spread is below $122/mt.
Freight is rich/a very slow bbq season is priced in the USGC, will be funny to see how things will go.
May/Jun VLGC Seasonality appears fully priced (markets believe that reduced demand will lower prices in the U.S and create arbitrage between east and west).


2014/04/23 $/MT Mt Belvieu/".." spread Freight Houston-"…" RV ($/MT) ARB US/".."
JAPAN CHIBA CFR 910 -$335/mt 218 37 $/MT
ARA CNF 768 -$193/mt 84 29 $/MT
Persian Gulf FOB 788 -$213/mt 135 (2) $/MT
Mt Belvieu TX Hub 575

Source: Data compiled from Platts, Argus, Clarkson.

Platts states its LPG FOB assessment for Houston is at +$80/MT over the non-liquid storage tank ex Mt. Belvieu, TX.

2014/04/23 $/MT Persian Gulf/Japan spread Freight Persian Gulf-"Chiba" RV ($/MT) ARB
($/MT)JAPAN CHIBA CFR 910 122 $/MT 128 $/MT (6)
Ras Tanura FOB 788

 Source: Data compiled from Platts, Argus, Clarkson.

What traders and markets will do, take down freight ? LPG fleet owners have an opportunity to lock their rates for the rest of the year at record high.

 What owners will do to lock 1 Yr TC rate ? Surf this wave ?! Conditional to have a loading date in Houston and charter a LPG tanker, an arbutrage is still possible for traders between ARA-Houston and Japan-Houston.  However, spots for LPG cargoes are extremely limited in the USGC. Targa Resources and Entreprise Partners terminals have only capacity for shipping 8 VLGCs cargoes per month each.
Among the reasons for the U.S LPG discounts on world’s markets are the surge of NGLs production from the shale gas drilling and a LPG infrastructure jam-lock in the Gulf Coast.




The OPIS Swap Futures Curve for Mt. Belvieu is already pricing an easing of the Bottleneck in the USGC for 2015.


Mr. Simon Jacques 

Expert on commodities trade and shipping based in Canada, author of The Trade, Shipping and Finance Wizard