The core of commodity trading lies in the pricing of commodities. Commodity prices serve as a barometer for the international economy. In the international commodity market, competition and interests among nations primarily manifest in the control of resources and dominance in commodity pricing. Simultaneously, commodity pricing is also a crucial means for enterprises to manage market price risks and control costs and profits.
Commodity pricing is a complex systemic engineering involving financial instruments such as forwards, futures, options, factors affecting costs including commodities, funds, exchange rates, interest rates, and basis, as well as business processes including quoting, trading, hedging, settlement, and delivery. Commodity pricing involves different combinations of financial instruments, price factors, and business processes to control risks and achieve trading goals. Therefore, understanding and designing commodity trading and pricing scientifically and systematically are crucial, harnessing the role of the commodity market as a stabilizer of the national economy.
[Elevating Commodity Pricing Power is Crucial]
Across global markets, commodity trading has essentially formed a pattern of "Eastern trading, Western pricing, pricing in USD, and futures benchmarking." As one of the largest commodity demanders, China has long been in a relatively disadvantaged position in global markets with limited pricing power, severely affecting industrial development, economic security, and international competitiveness. In recent years, China has accelerated the opening and development of the futures market, promoted the internationalization of the Renminbi, and made remarkable progress in commodity Renminbi pricing and settlement. During the "14th Five-Year Plan" period, China faces more severe external environments and more challenging development tasks, making it crucial to enhance commodity pricing power and resource allocation capability.
A mature domestic market can provide a more stable and reliable foundation for commodity pricing, enhancing the bargaining power and discourse power of domestic enterprises. As China's commodity futures market steadily internationalizes, efforts are also being made to promote the construction of the commodity spot trading market. This is achieved through various means such as combining futures and spot markets and issuing indices to expand China's price influence in international markets.
Energy is the main battlefield of the international commodity market. In 2015, China established its first national oil and gas spot trading center in Shanghai—the Shanghai Petroleum and Natural Gas Trading Center. In 2020, the Central Committee of the Communist Party of China and the State Council issued the "Opinions on Supporting Pudong New Area in Building a High-Level Reform and Opening-Up Pioneer Zone for Leading the Construction of Socialist Modernization," proposing to "build an international oil and gas trading and pricing center," supporting the Shanghai Petroleum and Natural Gas Trading Center to introduce more varieties of transactions, and raising higher requirements for the construction of spot trading platforms from the national level. Currently, the Shanghai Petroleum and Natural Gas Trading Center has made positive progress in exploring the market-oriented pricing of domestic oil and gas. It jointly released comprehensive import-on-arrival price indices for three products: crude oil, LNG, and LPG with the General Administration of Customs Global Trade Monitoring and Analysis Center, providing pricing references for China's oil and gas import trade. The Shanghai Petroleum and Natural Gas Trading Center optimizes resource allocation through spot trading of oil and gas, expands price influence through oil and gas futures, publishes price indices, and conducts derivative trading, playing an important role in enhancing China's discourse power and pricing power in the international oil and gas market.
It is worth noting that on March 28, 2023, China National Offshore Oil Corporation (CNOOC) and TotalEnergies completed the first domestic LNG purchase transaction settled in Renminbi through the Shanghai Petroleum and Natural Gas Trading Center platform. This beneficial attempt to conduct oil and gas trade settlement in Renminbi through the Shanghai Petroleum and Natural Gas Trading Center is an important practice to provide international resource traders with new channels to participate in the Chinese market and help build a new pattern of dual circulation of domestic and international development.
[Spot Pricing Models Mainly Divided into Three Types]
To enhance international commodity pricing power, it is necessary to understand and master the laws and characteristics of commodity pricing mechanisms. The spot pricing models of China's bulk commodities mainly include index pricing, basis pricing, and option trading.
Index pricing refers to a pricing method in which trading parties determine transaction prices based on commodity price indices for a certain period. The price indices referenced are compiled by enterprises in the bulk commodity industry based on transaction data from real bulk commodity markets over a certain period, representing market changes. These indices serve as important reference bases for macro monitoring, contract settlement, and enterprise risk control.
Among bulk commodities, iron ore price indices are the most typical under index pricing. As China purchases 50%-60% of its iron ore through spot trading, the leading international iron ore price indices are designed based on the Chinese iron ore spot market combined with sea freight prices. Currently, influential international iron ore price indices include Platts' Index, TSI Index from Metal Bulletin, and MBIO Index from Metal Bulletin.
Additionally, the pricing mechanism of long-term coal contracts is closely related to coal indices. The pricing of long-term coal contracts mainly adopts a market-oriented pricing principle based on negotiations between both parties, where quantity is fixed but the price may be adjusted according to market conditions. Since 2022, the new pricing mechanism for long-term contracts is formed by the average of the benchmark price and the floating price: the benchmark price is executed at 675 RMB/ton for 5500 kcal thermal coal contracts; the floating price undergoes monthly adjustments, currently using three indices including NCEI (National Coal Downstream Thermal Coal Price Index), BSPI (Bohai Rim Thermal Coal Composite Price Index), and CCTD (Qinhuangdao Thermal Coal Price Index), with the last issue of each month being selected, and an equal-weighted average is determined.
Looking at the spot market, many categories of bulk commodities are priced through indices. Therefore, compiling authoritative price indices is particularly important for perfecting commodity pricing mechanisms. Shi Qiuming, Dean of the Bulk Commodity Business School of the Periodical Press, stated: "Authoritative price indices are benchmarks for spot and futures prices. On the one hand, they can objectively reflect market conditions such as prices, supply and demand, and inventory, providing more accurate and authoritative price references for enterprises, helping enterprises make better purchasing, production, and sales decisions, and reducing operating risks; on the other hand, they can also provide reference basis for the government to formulate and implement relevant policies. In addition, for non-standard bulk commodities that are not listed on the futures market, such as Chinese herbal medicines, tea, fruits, and some rare earth products with small demand, since they cannot be priced based on the futures market, price indices often serve as important reference indicators."
"At present, international commodity index pricing mainly adopts a floating pricing mechanism, partially referencing futures market pricing, while a significant portion of standards is based on the average level of indices. So far, China lacks internationally recognized authoritative commodity indices, so there is an urgent need to launch a China Commodity Index recognized internationally. Of course, in the process of index compilation, pricing should be more based on changes in spot commodities and economic supply and demand to avoid the problem of excessive financialization of commodity indices," said Tian Lihui, Dean of the Institute of Financial Development at Nankai University.
It is worth noting that, for various reasons, some benchmarks for international commodity trade pricing mainly rely on international spot indices and over-the-counter market quotations. Therefore, industry experts call for relevant international institutions to establish a more rigorous and scientific index compilation.
