An Examination of the methods employed by companies in the commodity markets to enhance competitiveness: A case study of the oil and gas industry in UK
A dissertation research proposal based on the title.
Word Count / Required:
1176 / 1200
A difficult topic with very limited sources to work with. Nonetheless, I managed to find quite a few papers on similar topics and applied it on this research proposal.
One tip to find more sources on area-specific topics is to search government and education institute websites of that country. These highly trusted websites are usually accepted as sources by most universities. For example, google “site:ac.uk” to find results from educational institutes in the UK. This helps a lot when searching for sources.
Background and Rationale
Commodity markets alongside securities have grown several folds during the last two decades. There is a wide range of participants, ranging from investment banks to those who are specialists in commodity trading (Geman, 2009). One of the major reasons behind the market’s growth has been its highly volatile nature, which in essence follows the basic investment principle of high risk, high return (Chatnani, 2012). These participants enter the market with different objectives; those who look for an arbitrage opportunity to make short term gains as well as those who enter into forwards and futures contracts with the idea of hedging risks (Poitras, 2013). Talking of the commodities market, UK exchanges’ commodity market has a stable foundation of approximately £12 billion in the initial margin, which indicates the prevalence of transactions in large volumes (Marroni & Perdomo, 2013).
On the other hand, the highly regulated nature of the market poses significant challenges for investors to deal with. As the sector has grown, concurrently the authorities have looked to take steps to regulate the sector with the basic objective of enhancing competiveness (Geman, 2009). Evidence to this is the drop in headcount in commodities’ trading sector from 2,794 in 2010 to 2,176 in 2013 and a lower Value at Risk (VaRs) of leading commodities banks (Termeer, 2013).
The study shall evaluate the relative nature of the commodities’ market in the UK, in particular transactions related to oil and gas and the overall competitiveness of the sector. Moreover, the study shall incorporate strategies that are used by companies in the oil and gas sector to make commodity trading more competitive.
The proposed study shall address the following questions;
- What are the different methods that have been introduced in UK’s commodity markets to make it more competitive?
- Analyze the UK’s commodity market in the light of recent developments such as derivative instruments and other investor focused strategies adopted by firms operating in the market. Also, evaluate future prospects for this market in coming years.
- To what extent these strategies have increased the level of competition within the market and assess the investors’ response in this context.
Inkpen & Moffett (2011) write that in recent times commodity market has moved towards greater centralization with the basic objective of cost saving (Inkpen & Moffett, 2011). Since, freight costs greatly impact the pricing strategies of oil and gas in the commodity market, having centralized trading has allowed firms to materialize significant benefits. Moreover, this centralization has brought companies in the same marketplace, thereafter enhancing competition among them and also contributing towards the development of global commodity market.
Moving on, Heshelow (2010) suggests that companies have looked to adopt better management of transfer pricing risk (Heshelow, 2010). Transfer pricing risk basically relates to profit/loss allocation by multinational corporations operating in other countries by abiding by the local tax laws (Wittendorff, 2010). With better transfer pricing policies, firms have firstly ensured that all legal grounds are being complied by fully and at the same time this has been instrumental in building a strong reputation for firms in operating in the market. Since, commodity markets are highly volatile, reputation of companies proves to be a vital differentiating factor for investors.
Whaley (2007) is of the opinion that another key development towards enhancing competition in the commodity market is the growth of virtual market (Whaley, 2007). Leading markets around the world have a 24/7 trading mechanism, largely possible due to the advent of online trading. This has given investors with a wide range of options to choose from, thereby increasing overall competition in the market. To cater this market, firms are likely to maintain a strong online presence and be interactive with potential investors.
A report prepared by KPMG (2012) concludes that like other business segments, companies in the commodity markets have also applied cost leadership in their business models (KPMG, 2012). This is particularly common in derivatives trading, where there is a certain premium that is charged alongside the derivative instrument (forwards, futures and options). Depending upon the future speculations of the commodity under evaluation, firms may squeeze out their margins on the premium that they charge in order to lock in large volume transactions. Firstly, this drives out their competitors, secondly greater gains may be realized with transactions involving large volumes (Clark, 2014).
The research shall look to achieve the following underlying objectives;
- To assess the overall stature of commodity markets and commodity trading in UK.
- To evaluate the complexities of commodity markets and trading involved therein.
- To analyze the various methods that firms involved in commodity trading have brought in as strategies to enhance market competitiveness.
- To gauge the effectiveness of strategies direct towards increasing competition and how investors have responded to these initiatives.
The study shall be divided into two phases where both secondary and primary research methods shall be used to conduct the study. Firstly, in order to develop research hypotheses, it would be vital to grasp the key factors that drive commodity markets in the UK. This shall be done by studying literature from various sources including Finance and Economics Journals, publications issued by firms operating in the commodity markets, books and articles encompassing methods and strategies used by companies in the commodity markets to enhance the level of competition.
The second phase shall base on primary research where discussions will be held with people and representatives from leading firms who are directly involved in commodities’ trading in UK. This part of the research shall highlight the intricacies that are involved in commodity trading and how investors have reacted to initiatives such as centralized trading, managing transfer pricing risks and other methods employed to enhance competition.
Tentative timeline for the study is as follows;
|01.||Secondary Research||14th July – 28th July
|02.||Developing Hypotheses||29th & 30th July
|03.||Primary Research||1st August – 15th August
|04.||Testing Hypotheses||18th August – 27th August
|05.||Interpretation of Results||29th August – 2nd September
|06.||Reporting Writing – First Draft||4th September – 17th September
|07.||Changes and Modifications to First Draft||18th – 20th September
|08.||Report Writing – Final Draft||22nd – 26th September
Following are the anticipated outcomes of this study;
- Inspite of increasing competition, investor behaviour has less transformed and investors still remain largely risk averse as indicated by a low VaR.
- The undertaken initiatives have led to increased number of firms participating in the commodities’ markets which in the long run will be pivotal in the growth and development of commodities market in the UK.
- Commodities’ market is driven by a variety of external factors such as regulatory environment which are independent of the initiatives taken by companies operating in the sector.
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