The Price Reporters

A Guide to PRAs and Commodity Benchmarks

Owain Johnson

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351760553
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Every consumer in a modern economy is indirectly exposed to the work of a price reporting agency (PRA) each time they fill up their car, take a flight or switch on a light, and yet the general public is completely unaware of the existence of PRAs. Firms like Platts, Argus and ICIS, which are referenced every day by commodity traders and which influence billions of dollars of trade, are totally unfamiliar to consumers.

The Price Reporters: A Guide to PRAs and Commodity Benchmarks brings the mysterious world of price reporting out of the shadows for the first time, providing a comprehensive guide to the agencies that set the world's commodity prices. This book explains the importance of PRAs to the global commodities industry, highlighting why PRAs affect every consumer around the world. It introduces the individual PRAs, their history and the current state of play in the industry, and also presents the challenges that the PRA industry is facing now and in the future, in particular how regulation might impact on the PRAs, their relationships with commodity exchanges, and their likely direction.

This is the first-ever guide to PRAs and is destined to become the standard reference work for anyone with an interest in commodity prices and the firms that set them.

1 PRAs and the commodity markets they serve

Introducing the PRAs

Every energy user is indirectly exposed to the work of a price reporting agency (PRA) each time they fill up their car, take a flight or switch on a light. And yet the general public is completely unaware of the existence of PRAs. Firms like Platts, Argus, ICIS and OPIS, which are referenced every day by commodity traders and which influence billions of dollars of trade, are totally unfamiliar to consumers.

Even specialists who have spent their whole working lives in the commodity industry do not pay much attention to the role of PRAs the vast majority of the time, or at least until they violently disagree with something a PRA publishes or with its pricing methodology. Commodity traders reference PRA prices in their trades and place great reliance on their ability to assess prices fairly and accurately, but relatively few could explain why their market uses one PRA rather than another or exactly how PRAs reach their price assessments.

If even the professionals that depend so heavily on PRAs can get a little hazy regarding the finer details, it is not surprising that the general public has so little awareness of the key role played by PRAs in the modern economy.

There are over 100 agencies of various types that produce commodity benchmarks around the world today and they employ over 10,000 staff between them. These price reporters generate well over 100,000 assessments of commodity prices every week, with the largest PRAs assessing thousands of prices every day across a vast range of commodity markets.

Energy companies and to a lesser extent firms in the metals and agricultural industry rely upon these independent price assessments published by PRAs to manage their businesses. Trading in the energy markets would be paralyzed if the PRAs ever took a day off work. The PRAs are an integral part of the modern commodity business and therefore of the global economy.

PRAs have traditionally considered themselves to be media firms or publishers rather than providers of financial data. As such, it is only in the last few years that regulators have begun to examine the work of PRAs and look at how their assessment processes shape market behaviour and, ultimately, affect consumer prices.

The PRAs are slowly coming out of their relative obscurity into the light. Their work deserves to be better known. PRAs play a crucial role in the development of new markets and they help to promote trade in even the most developed markets by providing independent price references that everyone can agree upon. Price reporters in traditionally opaque markets like commodities do not have an easy time of it, but without their work many important markets would experience a reduction in transparency that would have knock-on effects on confidence, activity levels and, ultimately, on the cost of everyday goods and services.

Historical development

Most PRAs were founded by a single charismatic figure who decided to set up an information service after encountering a lack of transparency in a commodity market with which he or she was intimately familiar. Many of these founders were larger-than-life characters and they came from very disparate backgrounds: John Newbery was a key figure in British children’s literature as well as publishing The Public Ledger; John Williams founded The Iron Age after fleeing a failed uprising in Ireland; high-school dropout Warren Platt was on the spot in Ohio for the breakup of Standard Oil; Humphrey Hinshelwood founded ICIS after a spell as a music critic and theatre director; while Jan Nasmyth of Argus was a former British commando officer.

The first PRAs mostly started as mailed or faxed newssheets prepared by small teams of specialist commodity journalists. Publishing price assessments was an important element of their reports but was not necessarily the dominant business driver that it is today. Most started as journalistic enterprises and so provided news about market developments and company activities as well as analysis of price trends. This information was generally sold to customers on an annual subscription basis. Many PRAs have not moved far from their original business model, except that they generally now have websites and email their reports rather than posting them.

With time, other more ambitious PRAs expanded their coverage outside their original specialism into other commodity markets or into other regions of the world. Some have moved well beyond their humble beginnings to become billion-dollar diversified companies or profitable business units within giant corporations. But, whatever their size, all successful PRAs still share one characteristic: they are closely entwined with the commodity markets that they cover. Without a deep understanding of their chosen commodities, PRAs would become irrelevant and disappear.

Introducing the commodity markets

Commodities are defined as unprocessed or partially processed goods, such as grain, metals or crude oil. The markets for commodities are simply immense. Every minute of the day minerals are being mined, crops are being harvested and oil and gas is being produced. Every single country on earth imports or exports commodities: while Saudi Arabia will export crude oil and import rice, Thailand will do the opposite. Every single individual on the planet who is living above subsistence level is affected in multiple ways by international commodity prices, through the food they eat, the clothes they wear or the energy they consume.

This is why commodity prices matter. Changes in commodity prices can reshape the world. In recent years, rises in the price of agricultural products led in part to the upheavals of the Arab Spring, while dramatic movements in the price of crude oil – the king of commodities – have been responsible for changes of government and various ups and downs in diplomatic and military alliances. Sharp falls in oil prices in the late 1980s and 1990s led to regime change in Algeria and have been cited as a partial cause for the break-up of the Soviet Union, Iraq’s invasion of Kuwait, and the decline of the social-democratic consensus in Venezuela. Research by academic Jeff Colgan even suggested that between a quarter and a half of all international conflicts since 1973 have been related to oil and the oil price.¹

Supply and demand

Commodity prices are largely determined by supply and demand. In its simplest form, if the soybean crop is smaller than expected while demand is stable, then soybean prices will rise. And if oil-producing nations pump more oil than the world needs at that moment, then oil prices will fall. But in real life the markets are more complicated. For instance, governments may intervene in the price of commodities; changes in the foreign exchange markets affect commodity prices; while future expectations regarding supply and demand can influence prices now, even when the current supply-demand situation is quite different.

If we acknowledge the huge importance of commodity prices and the complexity of the factors that determine them, then it follows that accurate information about prices and the factors that generated them must be essential. How then does the world agree on what is the price of certain commodities? After all, there is no obligation on a Vietnamese farming cooperative to disclose the price at which it sold its coffee crop to a Swiss-based trading house. In fact, many traders make absolute secrecy about price one of the conditions of their deals.

In some countries, certain commodity prices are fixed by governments and there is no room for debate, although this is the exception rather than the rule. Other commodities are traded in public exchanges that make price information available either in real-time or with a small delay. But exchanges are primarily interested in listing commodities that trade very frequently and which are relatively transparent. This leaves a huge information gap for smaller or more niche commodities and this is precisely the gap that has been filled by the price-reporting agencies.

One very brief definition of PRAs could therefore be that they are firms that “report the price of commodities that are difficult to assess”. No one would subscribe to a PRA if they just had a general interest in the prices of the most transparent commodities. After all, every newspaper with a business page carries data on the trends in the price of major commodities like WTI crude oil or French wheat.

A subscriber to a PRA service is looking for much more detailed information and is prepared to pay a premium price for the data.

Some subscribers may be looking for much greater detail about the major exchange-traded commodities. A newspaper report can tell anyone where Brent crude oil traded yesterday but only a PRA can provide information about the likely trading level of, for example, a North Sea crude oil cargo delivered into a southern Chinese port in four months’ time. But in the main, though, PRA subscribers are looking for information about the hundreds of commodity markets that never feature in the newspapers or on business television shows. European jet fuel, Black Sea wheat, Australian iron ore and Brazilian ethanol are all major markets of global significance, but detailed information about their trading activity and price levels is hard to obtain. Information about these less commonly discussed markets is very valuable to commodity traders. This is the profitable niche that the PRAs occupy.

What do PRAs do?

Commodity markets are clearly hugely significant and PRAs are equally clearly important to those markets. But what exactly is the precise role of a PRA?

Anyone who has worked at one of these firms and has tried to explain their job to a loved one will understand how elusive a simple explanation can be. The working definition that we will use is that: “PRAs are firms that assess the fair price of commodities and report these values to a wider audience that then uses those assessments of price either for information purposes or else as the basis for physical or financial transactions.”

In order to be clear about what this definition means, we will break it down into its constituent parts.

PRAs assess the fair price of commodities

The first part of our definition was that PRAs assess the fair price of commodities. We have seen why the price of commodities matters so much to us all and we have also seen how difficult it might be to obtain information about commodity prices. The skill of the PRA is to obtain hard-to-find information about opaque commodity markets. As we will see in the next chapter, often the more difficult the information is to find, the higher its value to subscribers.

Even when there is a lot of information about what is happening in a particular market, the data can be confusing. Natural buyers of commodities usually want lower prices and so they will tend to pass on information that shows the market is oversupplied and that prices are weak. In contrast, natural sellers will constantly be reporting high-priced deals, shortages of material and frantic demand from buyers. Meanwhile, speculative commodity traders will flip between one side and the other depending on their position on any given day or week.

The skill of the PRA is to steer a path through these conflicting sources in order to reach an assessment of where the market really values a particular commodity. This requires a well-designed methodology for assessing prices. Assessments can be made in a number of ways and each PRA will make use of different methods depending on its preferences and on the market that it is covering. There will, however, always be some structure involved in the assessment process and this is typically provided nowadays in the form of written explanation of procedures and methodology.

There are many ways for price reporters to learn about how the market they cover is functioning. One traditional method of assessing prices is for the price reporter to talk to as many market participants as possible and to then make an editorial judgment call. More recently, new developments in technology have allowed price reporters to make use of trading screens to assess the fair value of commodities.

The key word in the phrase above from the definition is “fair”. In order to assess prices fairly and not to favour either buyers or sellers, the PRA needs a robust methodology and good engagement with a range of market sources. Any PRA that consistently assesses the market in favour of one side or the other will soon lose credibility. The most valuable asset for any PRA is its reputation: any perception that its assessments are biased would make it difficult for its business to survive.

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