What are commodities?

Commodity basics: what are they, how are they traded, and how can you get a related graduate job?

What is a commodity?

A commodity is a type of good which is standardised from seller to seller. For example, a kilo of refined sugar produced by one company is no different from a kilo produced on the other side of the world, whereas some consumer goods will differ in terms of the brand and the components used.

Knowing you pork bellies from your soya beans

Commodities can be sub-categorised into the following types:

  • Precious metals: including gold, silver and platinum
  • Industrial/ base metals: e.g. copper, zinc, lead and aluminium
  • Energy: oil, natural gas, ethanol and heating oil
  • Agricultural goods, also known as soft commodities or 'softs': wheat, soybeans, cotton, sugar and coffee
  • Livestock: including cattle, pork bellies and live hogs

How are commodities traded?

Commodities are bought and sold as contracts. These contracts can then be bought and sold by traders through an exchange, such as the London Metals Exchange (LME). This means that ownership rights can be transferred without the physical exchange of goods. Goods are sold either as a spot contract, i.e. at today's price, or as a futures contract, which allows the buyer to take delivery of the good at a point in the future at a pre-agreed price. The second method mitigates the risk to buyers and sellers of large fluctuations in price and stabilises their outgoing/ingoings over a longer period. It also enables traders to hedge or speculate on the commodities market.

Where do you fit in?

With the impact of commodity markets on the global economy ever more apparent, there and more and more job opportunities for graduates. Here are some potential positions for graduates:

  • Commodity analyst at a bank or investment firm
  • Commodity trader with a brokerage or hedge fund
  • Commodity analyst at a bank or investment firm
  • Commodity trader with a brokerage or hedge fund
  • Consultant working for an agriculture, metals or mining consultancy
  • Graduate with an energy company or a mining firm

The top companies to join

Most major investment banks have a team of dedicated commodity traders and research analysts. Top companies with a particularly strong focus on this area include Barclays Capital, Commerzbank and HSBC. Maths and economics graduates tend to be highly sought-after in these fields. There are also a number of smaller research specialists and consultancies working in sectors such as agriculture, metals and mining. Leaders in this field include CRU and Bidwells.The mining and energy industries are expanding fast. We would recommend looking at the majors in the first instance, who tend to employ large numbers of graduates from disciplines such as economics, geology and engineering. The market leaders in these fields include Shell, BP, Rio Tinto and BHP Billiton.