Physical, futures and spot: what is the difference?

Three words, three ideas

People in the commodity world use spot, forward and futures all the time, and newcomers often mix them up. The words answer two questions: when does the trade settle, and what exactly changes hands.

Spot trading

A spot deal is for prompt delivery. The price is agreed now and the goods are shipped or handed over in the near term, which in practice can still mean days or a few weeks because loading and transport take time. In physical markets, spot simply means the cargo is available now or soon, as opposed to a contract for a delivery months ahead.

Forward contracts

A forward contract is a private agreement between two parties to deliver a given quantity at a future date at a price fixed today or fixed by a formula. It can be shaped to fit the exact grade, port and shipment month, which is why physical buyers and sellers use it. The trade-off is that each party depends on the other to perform, so the counterparty matters as much as the price.

Long-term supply agreements are forward contracts repeated over time, often with monthly shipments and a pricing formula instead of one fixed price.

Futures contracts

A futures contract is a standardised agreement traded on an exchange. The exchange fixes the quantity, quality, delivery location and expiry, and a clearing house stands between buyer and seller. Because every contract is identical, positions can be bought and sold easily, and the large majority are closed out before delivery rather than settled with real goods.

Futures matter to physical traders for two reasons. First, the futures price is a widely watched reference. Second, a trader can use futures to offset price risk on goods they own or have promised to deliver.

How physical prices use a reference

Many physical contracts do not state a flat price. They state a formula such as a published reference price on an agreed date or average, plus or minus a premium or discount that reflects grade, location, packing and market conditions. This is called pricing off a reference.

• The reference: an exchange settlement or a published assessment named in the contract.
• The pricing period: a single day, the shipment date, or an average over a month.
• The premium or discount: the part that is negotiated for this specific cargo.
• The currency and unit: for example per metric ton in US dollars.

Hedging in plain words

Imagine a trader buys a cargo at a price linked to the reference and will sell it in four weeks. If the reference falls in between, the trader loses value. By selling a futures position of similar size, the trader offsets that loss with a gain on the futures. This is hedging. It does not create profit by itself; it narrows the range of outcomes so the trader keeps the margin on the physical deal. Hedging has its own costs and rules and is a separate skill.

Reference prices on Tonport

The market page shows delayed reference prices and exchange rates with short charts so you can sanity check an offer. These are references, not offers, and some products, like scrap, usually trade at a discount to the related metal price, so the comparison needs care. Use them as one input next to your own quotes for freight, insurance and handling in the trade P&L estimator.

Frequently asked questions

Is the spot price the price I will pay for a cargo?

Not usually. A spot or futures quote is a reference. The price of a cargo also reflects grade, packing, location, the Incoterm, the volume and the payment terms.

Do physical traders have to use futures?

No. Hedging with futures is a choice. Some traders sell what they buy quickly and carry little price risk, while others hedge systematically.

What does it mean when a price is quoted as a premium to a benchmark?

It means the final price is the benchmark value on the agreed pricing date plus an added amount. A negative amount is a discount.

Why do futures prices differ from physical offers?

A futures price is for a standard contract at a standard location. A physical offer is for a specific grade at a specific place and time, so transport, quality and timing create differences.