Commodities are basically raw materials. They play an important role in most aspects of the daily lives of Nigerians, serving as food (cashew, cocoa sugar cane), energy (natural gas, crude oil) and source of income for many global investors, as commodities can be an important way to diversify their portfolio beyond traditional securities.
Commodities play a vital role in Nigeria’s economy, accounting for more than 90% of its export.
Data obtained from the Central Bank of Nigeria shows that the country has a commodity-driven economy, with a total land area coverage of about 910, 768 Km2 of which about 33% is arable land and about 3.14% suitable for growing permanent crop.
Prices of major commodities such as crude oil, gold, cocoa have been on the rise since President Muhammadu Buhari shut the nation’s land borders, whereas the Nigerian Stock Exchange’s year-to-date return was over -12% in the first quarter before moderating to the current –8.99%.
Adeagbo Adedayo, Country Manager, Scope Markets Ltd, spoke to Nairametrics about why it’s the time for Nigerians to consider investing in commodities derivatives such as crude oil futures. He said;
“Looking closer at Nigeria’s main export, crude oil, every day we need energy to accomplish a lot of tasks from manufacturing down to the food we eat.
“Investing in such energy derivative that is involved in our daily activity is very lucrative.
“The oil price benchmark fell to its lowest ever in history as of March 8th, 2020, losing about 90% of its market value for the year 2020. This piece of information is very useful as an investor or to anyone who intends to trade crude oil.”
In a previous article, Nairametrics had advised investing in commodities as an asset class. However, because commodity derivatives are pretty new to many Nigerians, a lot of people do not know that they can manage portfolio volatility by allocating part of their funds to commodities as its value is inversely proportional to stocks and bonds.
Dapo-Thomas Opeoluwa, an independent oil trader, in a phone interview with Nairametrics, explained the advantages and simplicity commodity trading brings over other financial traded assets. He said;
“For a country that’s vested in oil, it’s quite surprising that very few people trade commodities. Most retail traders in Nigeria opt for currency pairs or cryptocurrencies that have harder fundamentals to follow.
“Which is easier to understand? British pound volatility because of Brexit, the Bitcoin Halving in May or oil price crashing to negative digits a few months ago? I think the latter gained more traction amongst Nigerians.”
Also, it will help expand Nigeria’s long-neglected agricultural sector, support government diversification agenda, encourage local farmers and enhance job creation, especially in the rural regions.
Common ways to invest in Commodities in Nigeria
Using commodity futures; These are agreements to sell or buy a given amount of commodity at a particular price and specified date in the future. They can be traded online through a broker that connects to a commodity exchange. Examples are Crude oil futures, Soybean futures.
Using CFDs; A contract for difference (CFD) is a derivative asset, where there is an agreement (usually between a broker and a commodity trader) to pay the differential in the commodity price of an underlying asset between the beginning and end of that contract.
Using the Physical method; The most popular way of commodity investing in Nigeria would be purchasing the commodity itself. Commodities such as cocoa, gold can easily be traded physically,
However, commodities like natural gas, crude oil, are not suitable for many such means because of their flammable properties and the fact that it’s expensive to store, and in the case of electricity, impossible to store.
Using Commodity based ETFs; Some Nigerians have investing in commodity-based exchange-traded funds (ETFs) via their broker who links them to the Nigerian stock exchange. An exchange-traded fund is a type of fund that is traded on a stock exchange.
Silas Ozoya, Managing Partner/CEO, SUBA Capital spoke to Nairametrics on the uniqueness commodity trading brings. He said;
“Inthe last few years, especially very recently, the commodity market has shown itself to be more stable than any other market.
“The market has faced rising inflation, a recession, naira devaluation, tightened FOREX regulations and of course, the pandemic and in all, still standing strong.
“When placed side by side the capital market, the commodity market is less volatile. Meaning that it’s less risky.
“Trading or investing in commodity enhances your diversified investment portfolio and hedges whatever risk that may arise from your other asset classes.
“Our current experience with the pandemic has shown that companies in agricultural commodities for example still had a pass to carry on business, make money and profit while other businesses were negatively affected.”
Finally, commodity investing/trading should be encouraged in an emerging economy like Nigeria given its low margin, transparency, risk management, and benefits to economic parameters like farmers that have been neglected over the years. The uncertainties surrounding the stock market and other investments during a period of high inflation like this could be hedged by investing or diversifying into commodities.