What is physical commodity trading?

Real goods, real logistics

Physical commodity trading is the business of buying and selling actual material: copper cathode, steel scrap, wheat, urea, coal, diesel, chrome ore and thousands of other products. Unlike a trade on a screen, a physical trade ends with a cargo that has to be produced, loaded, moved, checked and received by somebody.

That is what makes the work practical and sometimes difficult. A price is only one line of a deal. Quality, quantity, packing, shipping, insurance, customs and payment all have to line up, and each of them can go wrong in its own way.

What is traded

Commodities are goods that are interchangeable within a grade. One ton of a standard wheat grade is, for pricing purposes, much like another. That sameness is what lets a buyer in one country and a seller in another agree a deal from a distance, using a written specification instead of a visit to the warehouse.

The main families are:

• Metals and minerals: ores, concentrates, refined metal, scrap and ferro-alloys.
• Agricultural products: grains, oilseeds, sugar, vegetable oils, feed and softs.
• Energy: crude oil, refined fuels, coal, petroleum coke, biofuels and gas.
• Chemicals and fertilizers: urea, ammonium products, potash, solvents and polymers.

How money is made

A physical trader rarely needs to predict where a market is going. The usual margin comes from one of a few simple differences:

• Place: buying where a product is plentiful and selling where it is needed, after paying for transport.
• Quality: buying a mixed or lower grade, blending or sorting it, and selling a defined grade.
• Time: buying now and storing, or buying forward and selling later.
• Information and access: knowing who has the product and who needs it, which is why introducers and brokers exist.

The pieces of every physical deal

Whatever the product, a complete deal answers the same questions. If a question is left open, it tends to turn into a dispute later.

Who takes part

Producers and mines sell what they make. End users such as mills, smelters, refiners, feed companies and fertilizer blenders buy what they consume. Between them sit traders who take title to goods, brokers and introducers who connect parties without owning the goods, and a service layer of shipping lines, forwarders, inspectors, laboratories, banks and insurers. The article on who is who in a deal describes each role in more detail.

Why paperwork matters so much

Because buyer and seller are often in different countries and may never meet, trust is built from documents and third parties. The bill of lading proves the goods were shipped. The certificate of analysis shows what they are. The commercial invoice and packing list describe them for the bank and customs. Reading these documents carefully is a core skill, and every step is easier when the specification and the terms were clear from the first message.

Where to start

Pick one product you understand, learn its usual specification, and learn the cost of moving it between two places. Then start with a small shipment under clear terms. The landed cost calculator and the trade P&L estimator on Tonport help you check whether a price works before you commit, and the glossary explains the shorthand you will meet in messages.

Frequently asked questions

Is physical commodity trading the same as futures trading?

No. Futures are standardised contracts traded on an exchange, and most are closed out without any goods moving. Physical trading is the sale of an actual cargo with a delivery, documents and a payment route.

Do I need to own a warehouse or a ship to trade physically?

Not necessarily. Many traders work with goods that stay at the seller's site until loading and use forwarders and shipping lines for transport. What you do need is a clear way to specify, inspect, ship and pay for the goods.

What is a commodity grade?

A grade is a named quality level with defined limits, for example a protein and moisture range for wheat or a metal content for a concentrate. Buyers and sellers use grades so that a product can be described in a few lines.

How big does a first deal need to be?

As small as the logistics allow. A single container or a small trial lot is common. The aim of a first deal is to prove the specification, the paperwork and the payment route with the other side.