tragic discrepancies — Tarik Yildirim

While financial markets are hallmarks of transparency, liquidity and efficiency, commodity markets are the exact opposite. They are the most opaque, illiquid and inefficient markets of all. Despite this fact, people running commodity companies are on average much less sophisticated and educated than their counterparts in the finance world. This discrepancy is twisted and tragic.

Dealing in commodities requires much more than a smart mind:

You need to be very proactive while gathering information. (Even something as basic as who has how much stock is usually treated as secretive information.) This includes attending long, tiresome conferences, arranging prostitutes for certain people and bribing certain others. Since governments are frequently involved on the supply side and since supply is often constrained, you also need to maintain close relationships with the relevant officials.

You have to know the players in the your sector really well. Moves and trades in financial markets are anonymous, but those in commodities can be identified and traced. (The number of important players are a lot fewer.) Hence knowing the personalities and quirks of traders will give you hints about how they may behave under future circumstances and how they may respond to your future actions. You also need to keep track of who are friends with whom. Potential off-the-record collaborations happen all the time and change the market dynamics.

You need to watch closely certain macro economic indicators such as interest, inflation and growth rates. They affect each player's financing costs and investment projections. They also influence the demand for your products via a variety of complex channels.
Although most markets are denominated in dollars, your costs may not be. This means that you need to hedge whatever exchange-rate risks you are exposed to.
Finalization of each transaction usually takes some time and during this period your initial assumptions may go haywire. This requires you to manage counter-party risks via the available commodity finance and insurance mechanisms.
You need to keep track of developments in the futures markets which may be dominated by finance companies completely unknown in the spot markets. Future and spot prices can interact in very complicated ways. Causal arrows go both ways.
There is no single price in any commodity market. Each quotation is a function of delivery date, place and form of financing. In particular, this implies that you need to be on top of things in the shipping markets. Lots of things can go wrong.
As I had remarked elsewhere, a typical commodity supply agreement contains many hidden options. Pricing of these options requires as much financial sophistication as the most complicated structured finance products demand.
As if all these intricacies were not enough, in any given market, there is usually no single unique commodity that is being traded. In coal markets, for instance, traders negotiate prices with respect to parameters such as moisture, ash, calorific and sulfuric content. In chrome ore markets, they pay attention to iron-chrome ratio, and iron and silicon contents. The number of parameters often overwhelm those witnessed in the financial markets. Even if you can gather some timely information from publications and private channels, the data will often be so crude that no sort of future looking analysis can be conducted.

The most protracted recessions are caused by over investment in commodities markets. We need more sophisticated people in these sectors to avoid deep economic downturns. Colossal mistakes are made on a daily basis. The only reason why they are not noticed and corrected is because there is nobody knowledgeable enough to take advantage of them.

Unfortunately, a favourable demographic evolution is very unlikely to take place. The incumbents are rough government agencies and non-meritocratic family companies which have way too much power in their hands.