Why Some Commodities Trade on Exchanges and Others Never Will

Some raw materials have liquid futures markets and daily published prices. Others of comparable economic importance are traded entirely through private negotiation. The dividing line is standardisation.

Fungibility is the precondition

An exchange contract promises delivery of a defined quantity meeting a defined specification. For that promise to work, any lot meeting the specification must be as good as any other.

Refined copper of a stated purity satisfies this. So does a defined grade of wheat, or a barrel of crude with specified density and sulphur content.

Where value depends on characteristics that resist definition, no contract can be written that buyers would accept as interchangeable.

Some materials resist definition

Industrial minerals used in small quantities often vary by deposit in ways that matter to the specific process consuming them.

Two shipments meeting the same headline purity can behave differently in a furnace or reactor because of trace elements or physical form.

Buyers in these markets qualify individual suppliers rather than buying a specification, which makes an anonymous exchange contract useless to them.

Liquidity requires many participants on both sides

A functioning market needs enough independent buyers and sellers that no single participant's activity determines the price.

Materials produced by a handful of operations, or consumed by a handful of plants, cannot generate that breadth however well defined they are.

Attempts to launch contracts in concentrated markets have repeatedly failed for this reason, with volumes too thin for the price to be trusted.

Delivery has to be practical

An exchange contract ultimately rests on the possibility of physical delivery, which requires approved warehouses, agreed handling procedures and material that can be stored.

Commodities that are hazardous, perishable or expensive to store are difficult to accommodate within that structure.

Where delivery is impractical, markets sometimes use cash settlement against a published assessment instead, which shifts the burden onto whoever compiles that assessment.

What non-exchange markets use instead

Where no exchange exists, prices are established through negotiated contracts and reported by price reporting agencies that survey participants and publish assessments.

Those assessments become the reference in contracts, performing the same anchoring function as an exchange price but resting on judgement and disclosure rather than executed trades.

The methodologies behind such assessments are published and have been revised over the years, and how closely they track transactions varies by market.