The great scope in the SA commodities market is reflected in new derivatives products that the JSE has introduced


‘Despite a tough year for platinum, copper, silver and different crude oil markets, we are starting to see fund managers allocating cash back into these markets,’ says Chris Sturgess, the JSE’s Director of Commodity Derivatives.

The JSE has recently added two innovative developments to its bouquet of products in the metals and energy industries – a cash-settled palladium contract and the diesel hedge futures and options contract. Both make it simpler for South Africans to access global commodity markets and form part of the exchange’s bid to diversify its product range and offer more scope to investors.

The JSE has partnered with the world’s largest and most liquid derivatives exchange, the New York Mercantile Exchange (NYMEX), which is owned by the CME Group. The new move offers SA participants access to liquidity and exposure to the global palladium market. Local miners are able to access this liquid market to hedge their price risk in either rands or US dollars. The NYMEX contracts are cash settled, relying on the international NYMEX reference market for the final settlement value. For every standardised cash-settled contract, this will represent 50 oz of palladium.

It also provides investors with access to physical palladium through ETFs. Market participants are able to manage their exposure to adverse price movements on the underlying physical market.

JSE article
‘2016 will be an even better
year for these products. As an avenue for good returns, these are real alternatives to consider’


Sturgess believes there is always an opportunity to plug into a ‘deep and liquid’ market. The JSE has 20 years of experience in facilitating commodity derivatives contracts, and he is optimistic that this will continue to be a rewarding option. It affords hedgers the opportunity to off-lay price risk and continue operations, while offering speculators the chance to take on risk for financial reward.

‘I am confident that 2016 will be an even better year for these cash-settled products,’ he says. ‘As an avenue for good returns, these are real alternatives to consider.’

In yet another pioneering development, the diesel hedge contract protects investors from movements in the local diesel price. Furthermore, it can also be used to diversify a portfolio or speculate and profit from price changes.

‘Considering using the diesel hedge contract requires changing the mindset of players. It is a great time to look at a longer-term hedge as a user of diesel,’ says Sturgess.

‘The oil price has come down and while global oil stocks remain high, it won’t last forever. If the situation turns around, bearing in mind the currency component as well, then consumers of diesel could lock in prices for a future dated period.’

Sturgess argues that there is good scope for locking in the diesel price 12 months out as a way of managing increasing fuel prices. The diesel contract provides investors with a hedge against movement in the price of diesel. The hedge excludes any taxes that form part of the pump price of diesel since these cannot be managed out. Contracts traded in rand per litre and cash settled provide a hedge against movement in the local pump price of diesel.

The contract comprises 5 000 litres of diesel, and effectively manages the price risk of the basic fuel price component of the local diesel price. The JSE makes the necessary currency and volume conversion based on the international European benchmark contract.

For business owners and farmers, a locked-in price that helps manage costs and protects against the volatility in the diesel price could offer valuable peace of mind.

A clearing house guarantees the transaction and ensures that it is done in a transparent way. 

By Kim Cloete
Image: Fredrik Broden/reneerhyner.com