Commodities

How are different commodities categorized? How will net-zero policies affect commodity traders? Learn about the commodity supply chain and how it impacts your business.

What are commodities?

Commodities are a cornerstone of the global economy, as they are used to create a wide range of products bought by consumers such as food, energy and clothing.

Primary commodities are categorized as naturally-occurring or extracted raw materials which vary in quality and quantity. Secondary commodities are produced from primary commodities to meet market demand. They are usually mass-produced - meaning they are often of a similar quality and price - no matter where they originate from or where they are produced.

A basic and interchangeable good used in commerce, investors and traders can buy and sell commodities on the cash market or through financial derivatives. However, commodities are increasingly subject to regulation and carbon pricing. 

Over half of the world’s greenhouse gas (GHG) emissions come from extracting, processing and manufacturing materials, fuels and food. Material extraction has tripled in the last 50 years and it is increasingly difficult to measure emissions across these complex supply chains - which motivated CarbonChain to create the carbon accounting platform for the world’s commodities.

What are examples of commodities?

Commodities are used to create a range of commonly-used products, such as petrol, food and drink, furniture and clothing.

Commodities are usually divided into three groups:

1. Agricultural: These include coffee, corn, cattle, soya, sugar, as well as wheat (one of the most important food crops in the world)

2. Energy: Commodities in this category include natural gas (used to generate electricity), crude oil (used for transportation activities) and gasoline

3. Metals and minerals: These include steel, silver and gold (used to make jewellery and other industrial products), aluminum and aluminum ore bauxite, as well as copper (the most-widely used raw material for electrical wiring)

Commodities can also be referred to as ‘hard’ (natural resources such as oil reserves and metal ores, whose supply and demand are largely predictable) and ‘soft’ (agricultural produce and livestock which must be grown, cared for and often cannot be stored for long periods of time - and whose price-setting mechanism is much less stable, as production is often impacted by external factors such as extreme weather events).

What is commodities trading?

Commodities trading began in the 19^th century, following a rising demand for standardised contracts to formally trade agricultural products.

This led to the development of commodity futures exchanges, where options and futures on a range of commodities can be traded around the world.

When commodities are traded on an exchange, they must meet specified minimum standards, also known as a basis grade. 

Investors often view allocating commodities in a portfolio as a hedge against inflation. However, investing in commodities also leads to risks, as they are impacted by a range of factors, including market and regulatory conditions, consumer demand and climate change impacts.

How are the effects of climate change impacting the commodities market?

With climate change making extreme weather events more common, agricultural practices will be impacted, as the sector is dependent on the natural resources affected by the climate. Effects on agriculture will depend on the speed and severity of climate change, as well as how quickly the sector can adapt.

As the momentum to reduce fossil fuel dependence continues, the uptake of cleaner energy technologies such as wind power, electric cars, solar power and heat pumps has already led to a substantial change to the energy sector in the last decade. The International Energy Agency predicts this shift will continue and that the world will have a considerably different energy system by 2030.

As minerals and metals become increasingly important components for low-carbon technologies, demand is set to increase. Through its Climate-Smart Mining Initiative, the World Bank wants to ensure “mineral-rich developing countries are well prepared to meet this growing demand with the smallest possible carbon footprint, while safeguarding the environment and people.”

Moreover, carbon reporting and carbon pricing regulations are tightening on the commodities sector, such as the EU CBAM.

Commodities with CarbonChain

CarbonChain is the world’s first - and most trusted - carbon accounting platform built for commodity supply chains.

Commodity Traders

With carbon prices rising - and customers, banks and regulators demanding increasing levels of transparency on ESG risks - it is more important than ever for commodity traders to access credible carbon intelligence.

Commodity trade finance providers have the power to drive emissions reduction at scale. CarbonChain equips them with tools to do so.

Manufacturing

As carbon pricing becomes the norm worldwide, regulation-ready supply chains must be built. CarbonChain is the leading climate platform helping manufacturers future-proof their product lines by helping them measure, report and lower their emissions in line with disclosure requests.

Banks

Trade finance portfolios hold the world’s most carbon-intensive supply chains - yet traders are often unaware of their environmental impact. As climate regulation continues to ramp up, traders will increasingly need to quantify every transaction’s footprint.

Providing  the definitive carbon accounting platform for commodity trade finance, CarbonChain helps banks and traders lead on sustainable financing and drive their portfolio emissions to zero.

CarbonChain recently enabled a pioneering agreement between commodity merchant Concord and trade finance provider Societe Generale, piloting access to sustainability-linked loans tied to climate-related targets.

Adam Hearne, CEO & Co-Founder of CarbonChain, said of this commitment, “The commodities sector faces major disruption in the climate emergency. Collaboration between traders, banks, suppliers and producers is key to tackling carbon risk and getting ahead of regulation.”