Evidence of commodities trading goes back to the earliest times in recorded human history. Ancient Egyptians traveled the Silk Road to buy spices from China, while the Greeks were comfortable
selling forward contracts on olive crops. Until fairly recently, however, most commodities could only be traded directly on specific exchanges in a way that a Renaissance Venetian merchant would find familiar, limiting their popularity to all but the most speculative of investors. Today, by contrast, a large number of funds, options, derivatives, and other instruments related to commodities have made them much more
accessible and attractive. As their prices and returns do not necessarily follow
the more traditional asset classes such as stocks and bonds, they have proved
useful as a significant component of a well diversified portfolio.
To reflect the change in client and investor demand for what, in essence, has become a new asset class, UBS last year decided to invest in strengthening its presence in the commodities market.
Since then the business has grown in the range of products it offers. For example, it now offers structured
notes on a broad mix of underlying commodities to wealth management clients as an additional opportunity to make investment returns while further diversifying their portfolios. It also provides structured solutions and derivatives to corporations which use large quantities of commodities and to producers of commodities, to hedge against future price fluctuations.
UBS is also an active commodities trader. The acquisition and expansion of Enron’s energy trading activities
in 2002 has made UBS the leading physical supplier of natural gas among financial institutions in North America. In first quarter 2007, UBS intends to launch a European power and gas trading business similar to its existing North American business. Although only a third of the European gas and power market has been deregulated to date, many experts believe that the trend towards further liberalization will continue, opening up considerable potential, as the European continent’s consumption of gas and power is 80% of the level in the US. The recent volatility in crude oil prices, which has attracted a significant amount of market and public attention in the last year, has also led UBS to expand its crude oil trading activities globally, with trading desks now located in Stamford, Calgary and London.
In June, UBS launched the UBS Oilfield Strategy Index. Based on West Texas Intermediate crude oil (WTI), the new index will provide clients with structured financial products linked to the index in various maturities and currencies, including US dollars, euros, Swiss francs, and British pound sterling. In the same month, UBS also announced the launch of an innovative, Sharia-compliant structured commodities
product. The product employs financial contracts that follow the principles of Islamic law and comprises investment certificates whose performance is linked to a basket of commodities, which includes oil and base metals, and is principal protected. Investors can choose from a number of underlying commodities and a range of currencies.
Demand is very encouraging from all regions of the world. For almost a century, UBS has been providing both physical and non-physical precious metals trading. We are a full market-making member and
clearer of the London Bullion Market Association and a member of the London Platinum and Palladium Market Association. To complement this, in 2005 UBS joined the London Metal Exchange, enabling it to provide clients further access to the full range of traded base metals, including copper, zinc, tin, lead, nickel and aluminum.
With the current combination of buoyant demand and often restricted supply, metals look set to offer even greater potential for both clients and UBS in the months and years ahead. The recent acquisition of ABN AMRO’s futures and options business included their base metals team. This, along with the hiring of new staff for oil, power and gas, and the commodities structured derivatives businesses, will further strengthen UBS’s position, enabling it to take advantage of increased volume and deeper geographical presence.
Despite the recent drop in oil, gas and gold prices, UBS will continue to invest in the long-term growth of its commodities business. The early results of this strategy are encouraging and have already delivered revenue growth. Commodity prices will inevitably continue to fluctuate and as a result, UBS believes there will be a sustained demand for commodity products from individual and institutional investors, as well as corporations – demand that UBS is increasingly in a position to fulfill.
