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I was always wondering: How do you buy a commodity (for example oil or aluminum) on an exchange for a "real" purpose.

It seems like most resources on the net deal with how to "trade" them in a broker's account and speculate on prices. But what if you want to build a product out of copper or aluminum - how can you use the exchanges to get a good price on those commodities and have them shipped to your factory?

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The entire point of these exchanges is to deal commodities for delivery and in the past investors and speculators who didn't want delivery got into some trouble when they forgot to sell out of their futures positions before the maturity date. Indeed even the great (if you like that kind of economics ;) ) Keynes did this accidentally once whilst trading his Cambridge college's funds and they ended up filling the college chapel with grain whilst they worked out what to do with it! This story may or may not be true but always bears repeating: from the Economist.

These days the majority of people trading commodities are investors and speculators and even the majority of end users only use the commodities markets to fix a price and then take delivery directly from a producer rather than through the market. There are still, however, traders on the markets trading contracts that are stipulated as being "for delivery". The majority of these are agriculturals or non-precious metals and you have to have a relationship with your broker, and probably the exchange, to trade these as there are extra costs and considerations attached to for delivery contracts; particularly the cost of delivery to the end point where you need them.

Incidentally, although precious metals contracts are normally not for delivery this is because even people who want to hold the physical commodity want their broker to store it for them for security reasons. I'm not sure that I would want a pile of gold under my bed...

  • Thanks for the fun fact about Keynes. Interesting, I didn't think of the broker storing the precious metals for you - I guess the fees etc. per trade will be a lot higher than in the stock market for all these added services. – NoRyb Sep 25 '17 at 9:04
  • the fees are different; there is a storage fee completely separate from commission which depends on how long you want it stored for. The fees can be surprisingly low for precious metals given that they tend not to be bulky and commodity brokers tend to be storing their own stocks anyway so the marginal cost to them is low. – MD-Tech Sep 25 '17 at 9:09
  • it occurs to me that my answer is from an institutional rather than retail basis so YMMV as a retail customer! – MD-Tech Sep 25 '17 at 9:15
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    @MD-Tech The Economist article seems to be based on D. Chambers, E. Dimson, J. Foo, Keynes the Stock Market Investor: A Quantitative Analysis, J. Financial and Quantitative Analysis 50(4):431–449 (PDF; probably paywalled). That just says, "Equally, stories of his share-dealing from his bed and his commodity trading threatening to fill up King’s College Chapel with grain have become legend", without citation. The Economist then reports this as if it actually happened; my guess is that it was never more than a joke. – David Richerby Sep 25 '17 at 14:15
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    This story might not be true, but it is entertaining. – David Schwartz Sep 25 '17 at 19:57
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You can buy "real" commodity on a commodity exchange. Every exchange has rules for every traded commodity. The rules include also the day of delivery (usually few days, weeks after last trading day) and the assigned warehouse, where you should deliver, or pick up your commodity.

So even, if the majority of trades are hedges/speculation (you can see it on open interest column on the price list), there are still some left with real delivery.

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    Does this mean, you leave the broker with say, a contact for the logistics and have a contract with some transport company to move the purchased commodities? Do you have any kind of contact-infos from the entity you purchased your commodities from? On the stockmarket, you usually don't know who you bought your stocks from. – NoRyb Sep 25 '17 at 9:01
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    @NoRyb usually the broker has a logistics company that they have a contract with, your order may be filled by more than one producer/holder of the physical commodity so the broker has to workout the centralisation etc. – MD-Tech Sep 25 '17 at 9:11
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    @NoRyb the futures contract specifies what "delivery" means in terms of the contract itself. This will almost always be to some central storage and distribution facility. And additional transportation costs from there (and storage costs if you leave the delivery there!) are your personal responsibility - though of course your broker may be able to act as a subcontractor to make the arrangements for you. For commodities traded internationally, the contract delivery will most likely be to bonded storage, so you will have to pay customs or import duties etc to remove what you have bought. – alephzero Sep 25 '17 at 12:37
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The system is not designed for that, and you really wouldn't want to do that... even if you could. You will want a specific alloy of the material. Unless you have a hot mill or a foundry, you will certainly want someone else to extrude it into basic material shapes such as beam, channel, sheet, wire, etc. from which you will be crafting.

So even if you had gondola cars of the physical metal sitting in your yard, you would still want to sell that at market, and use the proceeds to buy the correct forms in the correct alloy.

  • Sell it "at market"? Like, via an exchange? If the exchanges really are purely for hedging and speculation, I see no reason why they would track actual prices for the commodities or anything at all. – Jeffrey Bosboom Sep 26 '17 at 8:24
  • @JeffreyBosboom A warehouse of ingots of the metal in question is a very practical hedge against changes in metal prices. "At market" like in the actual market. You know, like you might trade REITs in a building in lower Manhattan, but you trade actual houses with a broker or on Trulia. Same here, if you have a bunch of copper ingots, you seek a buyer just like you would on a house, but of course with much fewer buyers. – Harper Sep 26 '17 at 13:44
  • @Harper I see what you mean: My question was very simplified and probably a bit misleading - I just wanted to get clarified how these commodity exchanges work. I understand that in most cases, you wouldn't want to purchase the raw material unless you are for example an oil refiner. – NoRyb Sep 27 '17 at 7:01

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