While other sectors have fully embraced the power of technology, the commodity sector has been slow to the digital table. This is gradually changing though as firms have no choice but to look at the latest innovative tools, if they want to stay competitive, reduce costs and meet regulatory requirements.
In general, the key areas of digitalization are no different from many other industries – Artificial Intelligence (AI), Machine Learning (ML) and robotic process automation. Individually – and together – they can be applied across the trading value chain, ranging from pre-deal analytics (i.e. to take pricing decisions) through to contract settlement, as well as to numerous activities within the logistics cycle.
According to Manav Garg, founder and CEO of Eka Software, a global leader in providing digital commodity management solutions driven by cloud, blockchain, ML and analytics: “Despite the sheer size of the industry – roughly $10 trillion worth of commodities are produced and consumed annually the bulk of the business still operates traditionally.
Looking at the history of freight, the vast of bulk of commodities are still shipped mostly in the same manner they have for at least the last few hundred years – by railroads and sea.
Ports in the United States (U.S.) saw nearly $2.2 trillion dollars of exports leave in 2016, for instance, while over $2.7 trillion in imports entered the country. Together with railroads, ports comprise a key link in the world’s commodities supply chain and blockchain technologies are making inroads to bring efficiencies.
And, in European Union (EU), freight moved by rail transport in 2017 was estimated at 416 billion tonne-kilometres, which was up 3.2% over the previous year’s figure of c.403.3 billion tonne-kilometres across the EU’s 28 member states – from Austria to the United Kingdom.
Legacy systems and manual documentation and processes are still the order of the day, particularly in the trading of non-industrial, agricultural products.
IBM – aka “Big Blue” – and the Danish shipping giant Maersk for their part have been hard at work over the past couple of years creating a blockchain-based system for supply chain management to increase efficiencies and reduce paper work involved in the logistics process. The project has on boarded many of Europe’s largest ports of entry, already registering over 230 million shipments and 20 million containers.
Turning to the global metals trade, it exceeds $2.7 trillion per annum, with derivatives being over 60 times the physical market. Nearly 3 billion metals contracts are traded on the major markets each year by some 17 million commodities traders.
And while over the past decade, online tools have made trading in options, equities, forex and cryptocurrency readily available and trading has proliferated, there there is currently no readily accessible, specialist metals trading platform on-line and many traders stay away from metals.
Garg, who founded Eka after a brief stint as a trader with a large global commodity trading house, added: “This is not only burdensome, but also opens the door to fraud because the supply chain often involves several intermediaries along the way.”
In the past, the larger commodity firms did not pay that much attention to such matters as they were still able to wield influence.
Traders had proprietary knowledge, from outages at oilfields to crop conditions in emerging and developed markets, which gave them an upper hand. However, the democratization of data has meant that the small U.S. farmer does not have to turn to the behemoths as a source of information.
Armed with smartphones and tablets, they can access the same weather reports and market data, which enable them to cut out the middlemen and directly leverage the best trading opportunities.
Data Collection & Interpretation
This helps explain why data collection and interpretation in the commodities space will play an increasingly “transformative role” according to Garg, who graduated as an engineer from REC (Regional Engineering College) Jalandhar, and following that he gained an MBA from the Indian Institute of Foreign Trade (IIFT) in Delhi, India.
Access to real-time data, geospatial imagery, smart metering and better visibility will be paramount to sharpen the competitive edge. Furthermore, big data will facilitate decision making, ranging from cross-regional arbitrage to daily stock management.
Siim Õunap, COO of blockchain and crypto agency Savii Digital, commenting said: “Using blockchain as a technology of choice for data transfer has a number of benefits, whether it is for trading or improving logistics. In a similar vein and as it was clearly explained in a recent Forbes article – “Something’s Fishy on the Blockchain” – related to seafood fraud, when built up well, it brings the transparency of any product to a whole new level.”
The Estonian added: “Companies don’t need to prove the product origins or content and consumers know what they are consuming, where is it from and when was it made. This is on top of the benefits that companies get logistically. And, who knows, perhaps we won’t be trading tokenized contracts in the blockchain…but tokenized products themselves.”
Blockchain & Supply Chains
Garg believes that blockchain, cloud and mobile technology will be at the forefront, although blockchain technologies are still emerging. He ventures that it has the potential to transform commodities value chains, providing seamless, automated tracking, planning, and execution of commodity trades despite the various participants in the chain. Moreover, it can help lessen trading costs as well as settlement risk.
It was during his days as a trader that Manav saw the deficiencies in traditional trading and risk management software. And, realizing and eyeing the market opportunity, and combining this with his passion for technology, he established Eka with venture capital funding. Today, a number of leading commodity businesses run on Eka’s Commodity Management Platform including Cargill and Rio Tinto amongst others.
On the big picture front, the reconciliation and physical documentation of trades can be streamlined securely through an encrypted digital ledger.
Last September, energy groups including Royal Dutch Shell, Mercuria and Gunvor along with financial institutions such as ABN Amor, Citigroup, ING and Société Générale (SocGen), were poised by the end of 2018 to launched two new blockchain platforms – Kongo and VAKT – for reconciliation and physical documentation of trades.
At the time, Souleima Baddi, a former deputy head of commodity finance at SocGen and chief executive of Komgo, which was which was to focus on commodity trade financing via digitizing lenders’ customer identification documents and electronic letters of credit, remarked: “Blockchain technology will answer the needs of key participants in commodity trading by improving efficiency and security.”
Komgo, scheduled at the time to launch in around November 2018 alongside second platform, VAKT, which will concentrate on the actual raw material transaction, putting information and paperwork required for deals to be processed through the platform.
According to the participating banks involved with these blockchain initiatives, one experiment resulted in document processing being dramatically reduced to around 20% (a fifth) of the average, while an oil trade yielded cost savings in the range of 25% to 30%.
Jeremy Samuel, CEO and founder of Australian-based Metalicoin, which is seeking to deliver the world’s first Crypto Metal Exchange (CMX), commenting on the state of play said: “Supply chains span multiple organizations and jurisdictions. And, as such this is a perfect application for decentralized blockchain technology and distributed applications. In essence, metals become digital assets that are transformed ore to concentrators/dore into refined metal, which are delivered as the metals travel through the supply chain.”
Serial entrepreneur and blockchain evangelist, Samuel, who has 25-year track record in funding, growing and marketing companies in technology, mining, and digital media, added: “One of the key benefits of automating logistic and supply chain solutions on the blockchain is the data created. Miners and processors can use the data that has been created to generate insights, create efficiencies, reduce cost of site identification and exploration – and even monetize the data itself.”
Turning to On a more granular stage, Garg’s company Eka, recently became the first commodity specialist to launch a blockchain based “e-marketplace” with the Coffee Board of India. The aim is to whittle down the number of layers between coffee growers and buyers in order to create a more level playing field and assist in achieving a fairer price.
Specifically, the Coffee Board of India is using Eka’s Blockchain Marketplace app to connect producers to an efficient Marketplace, while providing ‘bean-to-cup’ transparency and traceability, another global first for a mainstream crop. With this app, the Coffee Board of India said it hoped to empower around 350,000 coffee growers in India (c.98% of whom are small growers) to access real-time pricing and trading.
Blockchain is also being targeted to facilitate supply chain management. Real-time and interconnected supply chains, with corresponding digital invoicing, shorter payment times and enhanced ways of sharing transaction data could help “alter the intra-company risk profile and appetite” according to Garg.
In terms of some of Garg’s predictions for the blockchain and commodities space forward, he believes that: “Blockchain will take center stage for mainstream usage for commodity flows and trust, which means that the way derivatives and physical goods are traded will change in a big way.”
He added: “Blockchain will enable much smaller units to be trade as units are available in trust systems at a much more granular level. For example, today coffee is traded in lots of 5 Metric Tonnes (MT) that could be reduced to 1 MT or even lower. This is important as is democratizes the production and supply chain, more so in the agricultural sector where individual growers will have greater (direct) Access to markets with increased transparency and traceability.”
Similarly, the Indian posited that the digitalization of trade flows and adminstration of individual documents will be performed such as quality certifications, etc.
Not surprisingly, against this backdrop, larger companies are rethinking their business models – with some being farther along the technology curve than others.
Take Cargill, the U.S.-based commodity giant. Two years ago, it started to build its global digital team and now has around 75 people focused on digital innovation and incubation, with a data science team of twelve. The company has also joined forces with Archer Daniels Midland Company, Bunge Ltd. and Louis Dreyfus Co. to standardize and modernize data across global agricultural shipping transactions.
Snapping at their heels are the smaller industry players, who are also looking to benefit from greater efficiencies, which lower the barriers of entry and clearing costs, improve pricing and mitigate settleme
While overall it is still early days for the adoption of technology in the commodity sector, the pace of its widespread uptake is quickening. But one wonders with all the heightened interest and platforms using blockchain springing up all the time, which ones will thrive and survive. Not all will be winners and at some point there will be platform consolidation. Watch this space.
This article was written by Roger Aitken and first appeared on Forbes. Follow Roger, an ex-FT writer who has penned various investment stories, on Twitter @AitkenRL, LinkedIn, Forbes, Google+. He won a State Street Institutional Press award in 2015.