Commodities traders who buy and sell as much as $5.67 trillion of raw materials a year say the benchmark prices for everything from oil (NYMEX:CLX13) to iron ore to gasoline are wrong as often as 27% of the time.
In a Bloomberg News survey conducted during the past eight weeks, 85 traders and analysts said they have little confidence in the assessed prices of crude, metals and iron ore. Regulators, including European Union Competition Commissioner Joaquin Almunia, may examine commodities markets, having already increased investigations of manipulation of benchmarks for interest rates, derivatives, foreign exchange and oil.
Five years after the global credit crisis prompted more regulation of banks, benchmark prices for hundreds of commodities are determined through surveys of anonymous traders who may have a stake in the outcome of the assessments. Unlike stock prices, available in real time at regulated exchanges for all investors to see, many raw materials that go into food, clothing and power are bought and sold in private.
“There will be growing pressure for more regulation,” David Wilson, director of metals research and strategy at Citigroup Inc. in London, said by phone Sept. 3. “Commodities markets have traditionally been a backwater that only specialists would have been involved with. Clearly these markets haven’t changed with the times.”
While prices for stocks, bonds and currencies are set by actual trades on exchanges, benchmarks for coal, iron ore, fertilizer, gas and some metals are determined by journalists. They establish the prices by collating data on available bids, offers and trades as well as phone and e-mail surveys. Those assessments are often used to determine payments in long-term contracts between buyers and sellers.
Bloomberg surveyed analysts and traders of energy, metals, iron ore, carbon and power. They were granted anonymity so they would give their unguarded opinions to the question: “How many times out of 100 instances do you estimate the assessed benchmark price for the main commodity you trade is unrepresentative of the true level?”
The mean answer was 27 and the median was 20. Crude benchmarks were the least representative in markets where more than five respondents gave answers, followed by oil products, metals and iron ore. Agricultural commodities had the greatest accuracy, according to the survey. About 270 people were contacted. Most of those who declined to give answers said they couldn’t quantify how frequently prices were inaccurate.