With more and more players entering the fray, risk factor in commodity markets the world over has also gone up.
An indicator for this was evident in a recent review report of Britain's financial regulator Financial Services Authority.
In its report, FSA said new investors in commodity markets and high levels of price volatility have raised the risks of financial failure in the sector. FSA further added that it would step up monitoring in this area, where a wave of new entrants has moved into what was previously a niche market predominantly used by producers and consumers to hedge price risk.
Now a broader range of players are active in commodities, attracted by high returns and the opportunity to diversify portfolios. These include hedge funds, pension funds, high net worth individuals and some retail investors.
The FSA said in its review unlike previous cyclical bouts of investment, it expects much of this money to stay.
To show the increase in business, FSA said London Metal Exchange, which trades non-ferrous metals such as copper and nickel, has turnover of more than $4.5 trillion per year.
The regulator said aggressive and high-volume trading and ambitious investment funds meant the environment had changed for the more traditional users of the markets.
As more firms have entered the market or expanded their operations the limited pool of experienced staff in the market has also become stretched, FSA added.
Rapid growth in these markets has made it more difficult for firms involved, such as investment banks and trading companies as well as futures exchanges, to hire staff with the necessary skills.
The FSA is also concerned that the growth of investment in commodities, the development of new products and new entrants poses other risks for investors.
The UK regulator has not proposed taking any specific action, but wants firms involved in commodities to tackle the risks it has identified. These include recruiting and retaining staff with the appropriate level of expertise, ensuring trading systems and back-office systems can cope with a huge increase in trading.
Firms also need to cope with increased volatility in some markets, which raises the cost of trading and the risk of financial failure.
The regulator is also concerned about the risks of firms that have indirectly invested in commodities by buying up power stations.
