New capital markets are opening up

International platforms are increasingly offering Georgians new areas for investments

New capital markets are becoming accessible for Georgians and this time they sound a lot more familiar than those in the financial sector – they are for metals and agricultural products with a place in Georgia’s economy. While major banks keep their commodity activities low profile, and engage with the markets via third parties, more and more international brokers operating in Georgia are offering services via links with global electronic platforms to enable trading in these raw materials.

Services are increasingly available that enable companies to cover price risks and other uncertainties by buying and selling a variety of contracts–futures, options, credit default swaps, and so on–in the materials they produce, import or export. They also offer investors the chance to trade in products where stories are easy to follow. Commodity market prices are largely driven by “real world” buyers and sellers, such as multinational companies, that trade raw materials as part of their day-to-day business activity. Retail investors, looking for diversification, can also take a view on whether the price of a commodity will go up or down, without necessarily owning a physical barrel of oil or a bushel of wheat.

In an exceptional public show of interest in commodities among Georgia’s major financial groups, Bank of Georgia’s investment bank, Galt & Taggart (G&T), publishes the price dynamics of locally pertinent products–gold, wheat, copper, oil, natural gas, ferrosilicon and ammonium nitrate. These are all important raw material production and exports or imports for the Georgian economy and all are traded internationally. Together business in them was worth approaching $2bn last year. The trading price dynamics can be seen in a freely available G&T monthly online publication – Commodities Monthly Outlook. This also gives a valuable window on the background to Georgia’s economy.

A Georgian law on commodity exchanges was passed in 2009. However, according to a report published by the World Bank and United Nations, Commodity Exchanges in Europe and Central Asia, most of the multitude of markets that were opened, including Georgia’s exchanges, “soon became non-operational.” Georgia’s economy by itself is too small to make such a venture commercial, there is little local understanding of such markets in Georgia and regional cooperation looks unlikely. The larger potential markets of electricity and bonds are where the country is focusing its attention.

The same challenges can be seen across the region. However, arguments for “small, low-cost, focused, highly efficient micro-exchanges that use an electronic trading platform to trade a broad range of products”, particularly for agricultural commodities, are highlighted in the World Bank – United National report. It lists the advantages of having such exchanges as “managing price risk… reducing counter-party risk …increasing price transparency… certifying the quality of commodities.” But, it concedes that to establish them, not only must there be political support, this also “needs strong buy-in from key areas in the local private market.”

Meanwhile trading on electronic exchanges in the US, Europe, the Pacific region and elsewhere in metals and agricultural commodities is being promoted online to Georgian investors and corporations. Well-known international names include Interactive Brokers, the US multinational brokerage firm which operates the country’s largest electronic trading platform. Among them are also Poland’s XTB and Oanda, IG.com from London and South Africa’s Admirals Markets. Many of the brokers’ sites offer market information, research tools and education material.

Yet the risks of trading can be high, and most online brokers’ sites carry warnings. The dynamics of the prices of the commodities important to Georgia’s economy outlined in the G&T report shows market volatility all too clear.

Oil products are the most important of the Georgian commodities (the volume of gasoline and diesel imports rising by 6.6 percent in the first eight months of the year, which, with a 10.7 percent price increase, totaled $644 million, up 18 percent on the same time in 2023). The World Bank has recently warned of a looming oil glut on the back of oversupply and declining consumption, which it says could bring six percent falls this year and next. It also warns that oil’s fall could drive a five percent decline in 2025 for overall commodity prices. However, as the G&T Commodities Outlook illustrates, market prices rarely move in straight lines, and a decline in September was “quickly overturned by a sudden surge in prices…. following the significant escalation between Israel, Hezbollah and Iran.”

Natural gas prices (imports cost Georgia $235 million, down 19.7 percent, in the first eight months of 2024) have been relatively steady for some time. They are expected to remain so, but, says G&T, “may be easily destabilized by a sudden and unexpected demand surge.”

Gold has been a strong export winner for Georgia over recent years (amounting to $67 million in the first eight months of 2024, up 15.9 percent, helped by a 22.6 percent export price rise.) It is the favorite haven investment worldwide amid geopolitical or financial market upheavals, and increasingly in demand by central banks as a reliable store of wealth. Gold has risen in price to record highs as currencies lost their yield attractions on falling interest rates. Currently, worsening global geopolitical risks augur well for further buying and are expected to at least hold prices.

Very different has been the gyrations in the price of copper, another metal produced in Georgia. On the production front, Georgia operations have wound down, the business being mainly import of ores and re-export in the form of products. (This has shrunk considerably and, partially due to a 34 percent fall in export prices, was worth $81 million in the first eight months of 2024, down 28 percent on 2023.) Internationally, the price of copper hit an all-time high in May, a run fueled by the anticipation of US interest rate cuts, before plunging back on oversupply and high stock levels. Decelerating growth in China, the world’s largest consumer of commodities, was mainly to blame

However, brokers say the long-term bull case remains intact for copper as the “metal of electrification,” with significant shortages projected in coming years. G&T commented that “copper producers warn that the deficit will worsen over the next decade…” Major miner BHP names the rise of AI data centers as the source of strong future demand.

The picture in Georgia for another metal, ferroalloy, is uncertain, despite improving exports. (The value of exports for 2024 by the end of August was $220 million, up 91 percent from 2023.) Ferroalloys are iron-based alloys that contain significant amounts of elements, such as chromium, manganese, or aluminum and are crucial to the steel industry as enhancers of corrosion and wear resistance and strength. However, international ferrosilicon market prices are around a third of those of two years ago, causing Georgian Manganese, a major exporter of ferroalloys, to announce last month a four month halt on production until March 2025. But it also cited the ongoing industrial disruption at its Chiatura mines by workers seeking a halt and compensation for damage to their houses and orchards they say has come from mining.

Smaller in value, and with more direct impact on the economy than the commodities listed so far, agriculture commodities are nonetheless highly important in Georgia. This is due to the impact of their prices on inflation and the fact that 40 percent of the population, according to the Work Bank, rely on agriculture for their living. The local commodities covered by G&T encompass just two agricultural materials, fertilizers, and grains.

Falling prices for nitrogen fertilizers have hit Georgia’s production. This was the result of lower grain prices, which left farming customers worldwide unable to afford to buy. (Georgia’s export revenues reduced from $113 million to $81 million in the first eight months of 2024.) Other factors that have taken world fertilizer prices down 22 percent below the 2023 level have been increased production and lower feedstock prices. The World Bank expects the fertilizer price index to drop by 24 percent this year, and then edge up in each of the next two years, supported by orders and by export restrictions, particularly by China, which aims to ensure its domestic supplies. “Upside risks to this forecast include adverse shocks to input costs, especially natural gas prices, while a resumption of China’s exports could help ease prices. Weaker-than-expected global growth remains a key downside risk,” the World Bank states.

Wheat prices quoted for Black Sea futures contracts have fallen steadily from the peaks in 2022. (Georgian wheat import value has risen by 30 percent so far this year and volumes are up 51 percent, “driven by lower average import prices (down 13.7 percent). According to G&T, price prospects are uncertain, even in this market: “any future mismatch between demand and supply dynamics may easily tip the prices.” It adds: “Meanwhile, poor weather in larger producer countries and low Chinese demand are more-or-less balancing each other.”

In the coming years, freight derivatives could be added to markets covered for Georgian corporates and investors, as business through the Middle Corridor trade route increases.