The Future is Now for Efficient Metals Markets
For nearly a decade, I've been part of a team that develops solutions to improve efficiency of OTC markets - mainly in credit, rates, equities and FX. Over the years we have had opportunities to get involved in commodities, but the time never seemed right, until about a year ago when we began to work with the industry to modernize the systems used in trading and managing physical inventory in base metals.
The light bulb went off when we recognized the similarity between commodities markets and how the swaps markets used to operate: a lot of paper is being pushed around, it's a challenge to reconcile inventories and manual processes result in higher than necessary cost and operational risk.
Reduced Paperwork and Gaining Efficiency
The core problem for firms storing commodities is that they receive inventory information from dozens - if not hundreds - of warehouses worldwide as well as the transportation companies that move their stocks. Bills of lading, warehouse receipts, warehouse releases and stock reports create a pile of paperwork that is in different formats and languages. It's a major challenge to reconcile all that and keep accurate and up-to-date books.
Until now, firms coped by adding manpower to overcome this challenge. But throwing bodies at a problem isn't scalable and eventually firms need to invest in technology solutions.
We knew we could help firms manage this more efficiently using our trade processing expertise and technologies we've already applied to other markets, such as syndicated loans. And while initially focused on base metals, we knew our solution could be extended to gas, oil, agriculture, and precious metals, among other markets.
Major Bank Uses Cloud Technology to Modernize Commodities Operations
We worked in partnership with a major bank to create a cloud-based solution that requires no technology uplift from users or warehouses. Using optical character recognition (OCR) and artificial intelligence (AI) to extract and present critical data in a standardized way, users gained near real-time access to the information they need.
It's the end-of-the world of reconciliation as we know it - and our client feels fine!
Traders also like the system, because they can instantly see stock data and no longer run the risk of receiving outdated information from the logistics team. We are aiming to take this capability even further by allowing traders to forecast warehouse fees so they can more easily calculate the full cost of the trade lifecycle and optimize margins on new deals.
Why is this important?
We have all read reports that western aluminum smelters have been closing, but global demand remains growing at 5-6%. The London Metal Exchange has published aluminum prices that exceed $1600 per metric ton, despite the fact that physical delivery premiums continue to fall. Warehouse companies in Asia continue to offer incentives, but traditional locations in North America and Europe are no longer offering similar incentives.
Moreover, The Wall Street Journal recently wrote about the sugar market, revealing that a relative new comer was buying and taking physical delivery of about 8% of global production. The article goes on to state that only 0.5% of commodities trades result in physical delivery, but firms are finding this "economical."
With this in mind, it's important to recognize that commodities are exchanged in dynamic, real-time markets where physical inventory can be an advantage to traders who have the technology required to achieve a real time view of risk and opportunity. Indeed, Glencore, the world's largest zinc trader, has demonstrated the correlation between savvy inventory management and profitability.
Technology will enable more market participants to hold metals, making physical delivery a practical option for a larger number of firms. A larger market leads to greater efficiency and accuracy in pricing - which is good for the economy (and is very interesting to this commodities newbie).
Rob Kolpin, Director, Trade Processing Sales
Tel: +1 646-505-2338
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