Commodities traders who buy and sell as much as $5.67 trillion of raw materials a year say the benchmark prices for everything from oil to iron ore to gasoline are wrong as often as 27 percent of the time.
In a Bloomberg News survey conducted during the past eight weeks, 85 traders and analysts said they have little confidence in the assessed prices of crude, metals and iron ore. Regulators, including European Union Competition Commissioner Joaquin Almunia, may examine commodities markets, having already increased investigations of manipulation of benchmarks for interest rates, derivatives, foreign exchange and oil.
“The survey shows there is clearly a concern that others could be using these price-making mechanisms to bias the price up or down depending on their interests,” Shaun Ledgerwood, a senior antitrust consultant at the Brattle Group who formerly worked at the U.S. Federal Energy Regulatory Commission, said by phone Sept. 30. “However, from the traders’ perspective, no other mechanism provides as reliable a source of information.”
Ensuring the accuracy of benchmarks has gained urgency as the global commodities market surged. World trade in agricultural, mining products and fuels swelled to $5.67 trillion in 2011 from $1.34 trillion a decade earlier, according to the World Trade Organization in Geneva.
Regulators around the world have tried to make the financial system safer and more transparent in the five years since the collapse of Lehman Brothers Holdings Inc. As they examine markets that remain opaque, they uncovered attempts to rig the London interbank offered rate, or Libor, referenced in contracts valued at about $600 trillion. Royal Bank of Scotland Group Plc, UBS AG and Barclays Plc were fined a total of about $2.5 billion since June 2012.
Requiring that commodity-price benchmarks be set by observable deals may backfire should traders decide it’s safer to avoid participating in assessments, said Clare Hatcher, a consultant at London-based law firm Clyde & Co.
Sugar, coffee and cocoa are determined in private negotiations, with prices set at a certain amount above or below exchange-traded futures. In these spot markets for prompt deliveries, reporters call traders and brokers and then publish the values in news articles.
Even for gold, with its pricing system that has lasted more than 90 years, it would be “naive to discount the possibility of price manipulation,” said Mark O’Byrne, director at brokerage GoldCore Ltd. in Dublin. In the spot market, transactions between banks are reported by participants directly to news organizations. Prices used by mining companies for hedging are published by London Gold Market Fixing Ltd. Five banks carry out fixings every morning and afternoon to set benchmark prices.