Commodity swaps are developing more slowly than some dealers expected, despite the entrance of several large banks into the market.
The slower-than-expected growth contrasts with the high expectations that surrounded commodity swaps in July when the Commodity Futures Trading
Commission effectively gave the go-ahead to the new market."There's been a lot of publicity, but so far there haven't been many new deals done," said David Hammer, vice president of Phibro Energy, Salomon Brothers Inc.'s energy trading subsidiary. "It takes longer to put deals together than most people realize."
Commodity swaps are transactions designed to reduce price risk for producers and users of commodities. In some cases, swaps are very similar to forward sales. In other cases, swaps involve an actual exchange of two commodities: for example crude oil for jet fuel.
Although the growth in commodity swaps has been a mild disappointment, dealers estimate that the principal value of commodity swaps will grow about 20 percent this year, a rate that some dealers say could continue for several years. The current principal value of commodity swaps is estimated at $2 billion to $4 billion.
"There hasn't been a surge of deals, but we've had good, solid, continual growth," said Jack Cogen, vice president of Chase Manhattan Bank's commodity swap group. "I think the market will grow in a steady, unspectacular fashion."
A number of banks have gotten into the commodity swap business, including many of the New York moneycenter banks, a few regional banks, and banks that are making a major push into risk management services.
Some of the banks simply function as intermediaries between swap counter- parties. Other banks take on positions from customers and then hedge their risk with futures, options or other instruments.
For the most part, commodity swaps continue to be limited to petroleum and petroleum products and metals. There are rumors that some of the major grain companies have begun using swaps, however, no one in the grain trade could confirm the rumors.
If grain companies are using swaps, they are probably doing deals directly with each other, rather than utilizing bank swap dealers, sources said. Consequently, grain companies could be doing swaps without the knowledge of most swap market participants, the sources added.
Sources speculate further that grain companies may be motivated to use swaps because of dissatisfaction with the futures market, particularly with the entrance of large commodity funds into the markets. Normally, large grain companies have superior knowledge about market conditions and where prices are going. However, commodity funds have added an unpredictable element into the mix, making it more difficult for grain companies to anticipate price movements.
A spokesman for Archer Daniels Midland Co., Decatur, Ill., said, "We don't do that," when asked if they have used commodity swaps. Inquiries to other major grain companies went unanswered.
A major obstacle to the use of commodity swaps, bank dealers say, is the lack of knowledge about how swaps work at many commodity-based companies. In addition, at a typical company, several executives have to approve entering into a commodity swap, a process that can easily go astray.
"The chief financial officer may understand swaps completely and feel very comfortable with a commodity swap transaction," Mr. Cogen said. ''However, you might also have to talk to a purchasing manager who has no background in swaps."