Nickel Blowup Made a Lot of Trouble

One way to have a commodities exchange would be that you get the nickel producers in a room with the industrial users of nickel and they agree to sell each other nickel. Each producer would say “I am going to make X tons of nickel this year, who wants it,” and each user would say “I am going to need Y tons of nickel this year, I’ll take some,” and they’d agree on prices and delivery dates. The producers would lock in buyers for their nickel, the users would lock in a supply of nickel for their factories, everyone would be as hedged as they wanted to be. (Or not: A producer might sell all of its production for the next three years to lock in prices, or it might sell only this week’s production and take a chance that next week it will get a better price.) And they’d all negotiate credit terms: If I agreed to buy nickel from you next year, we’d agree on how much of a down payment I should give you now.

Obviously this happens, in the sense that industrial users of commodities do often have contractual agreements with suppliers of those commodities to take future deliveries. But it is not particularly how commodities exchanges work. A modern commodities exchange is a considerably more abstract thing, a place for financial betting rather than a place to arrange delivery of nickel for your particular factory. Commodities exchanges trade standardized contracts for standardized amounts and grades of the commodity, deliverable at standardized locations (often warehouses affiliated with the exchange), with standardized credit terms in which the exchange sits in the middle of every trade. The trades are for fungible standard contracts, not for delivery of particular cargoes at particular warehouses.