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  Home Page > Corporate Banking >Financial market >Corporate Risk Management >Commodity Forward Trading
Commodity Forward Trading
 

I. Introduction
A contract between a company and ICBC in which the seller agrees to deliver to the buyer a given quantity of an underlying commodity at an agreed price (in USD) at a specified future date (no commodities are exchanged during the trade).

Underlying commodities mainly include: base metals - copper, aluminum, lead; precious metals - gold, silver, platinum; energy - 180 cst Singapore oil, 380 cst Singapore oil, WTI crude oil, Brent crude oil.

II. Target Clients
Corporate clients who have a good knowledge about international commodity market and need to manage the commodity price risk. They are mainly bulk commodity producers, traders and end-user companies.

III. Functions and Features
Simple structure, easy to understand, by participating in the international commodity market through ICBC, customers can sell (long hedge) or buy (short hedge) to hedge from a rise or fall in the commodity price. 

IV. Advantages
1. Tailored solution: ICBC offers solutions tailored to the needs of corporate clients.

2. Transparent, good price: ICBC prices are closely in line with international market changes. Moreover, ICBC, being one of the most influential active participants in international interbank market, is able to offer good prices to customers. 

V. Service Channel and Hours
Customers are welcomed to apply during banking hours at any ICBC branch licensed to offer the service.

VI. Sign up
1. Sign master agreement: Customer who wishes to enter commodity forward trading contract must sign with ICBC the ICBC Risk Management Service Agreement.

2. Assess the customer: ICBC will make an overall assessment on the customer (business nature, experience in trading financial derivatives, internal management and control). Customer fills in Customer Evaluation Form.

3. Enter contract and read ICBC risk statement: Customer has the choice to enter one contract at a time with ICBC by signing ICBC Customer Confirmation on Financial Derivatives for Corporate Accounts.

4. Supply guarantee: Customer has the choice to pay margin or provide collateral, or use the credit line specially granted for trading derivatives. During the validity period of the contract, ICBC will provide dynamic management services on the margin according to the market value of the commodity forward contract.

VII. Risk Warning
Commodity prices in international market may fluctuate depending on the international and domestic political and economic conditions and other sudden events. All risks and losses after settlement shall be borne by the customers. Under no circumstance ICBC shall be liable.

VIII. Definition and FAQs
A commodity forward trading contract has fixed price and floating price.

Fixed price: Buy/sell prices stated in the contract.

Floating price: Official settlement price stated in the contract for the underlying commodity.

Take the official settlement price of base metal in forward trading contract, it is LME ("London Metal Exchange") last cash offer price quoted during the second ring session in the morning. This is the cash price and 3-month forward price, also the price for calculating monthly average price.   

IX. Notes
Commodity forward trading contracts should be settled as early as possible. Head Office, branch and customer should be kept informed at all times. Communication must be clear, fast and accurate to avoid the loss due to market price fluctuation.

X. Example
On February 1, 2011, a refinery plant planned to buy a copper mine with 1000 tonnes of copper on May 1, 2011. Copper price for delivery on May 1, 2011 was around USD 9800 per tonne. To lock down the cost, the company entered a forward contract to buy a certain quantity of copper at USD 9800 per tonne. In this way, the company can protect from a rise in copper price between the period from February 1, 2011 to May 1, 2011, which meant higher cost.

Due to tight supply, on May 1, 2011, the LME settlement price for spot copper was USD 10,000 per tonne. The forward contract of the refinery plant expired on May 3, 2011.

If no hedging, the refinery plant had to buy copper at USD 10,000 per tonne. By entering the forward contract, the refinery plant paid USD 9,800 per tonne and saved (USD10,000 per tonne - USD 9,800 per tonne) *1000 tonnes = USD 200,000.

Note: Information herein is for reference only. Refer to the announcements and regulations of local outlets for further details. Industrial and Commercial Bank of China Limited reserves the final right of interpretation.


(2012-08-30)
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