Physical Commodities Trading in Digital Age
Physical commodity trading is a traditional business which is highly dependent on paper documentation. From the letter of credit to the bill of lading, paper is everywhere. They are physically circulated, involving many stakeholders like sellers, buyers, vessel captains, banks and several intermediaries. Communication between the parties mostly take place through phone, fax and heavy emails, which becomes rapidly time-consuming, owing to the large number of parties involved. The commodity trading business is a long process as the information is shared sequentially by all parties. The tasks are mostly repetitive and labor-intensive and manual data capture add to increased operational risk.
The traditional process of commodities trading is thus plagued by numerous challenges, as in today’s world, people expect higher transparency, more efficiency, tighter security, quicker delivery and reduced costs. Hence, going digital is the best way to address all these challenges.
The following three technologies have given a new direction to the centuries-old commodities trading business.
1. Blockchain
The biggest advantage of blockchain in commodities trading industry is Real-time monitoring of goods. Today, commodities trade and finance operate on a double-entry accounting ledger, but blockchain will make it a triple-entry ledger. In a double entry ledger, one counterparty sends money to another and the other counterparty receives it. So, the two entries include debit and credit. In a blockchain network, there will be a third entry apart from these two, i.e. the immutable ledger entry. In other words, this third entry will bring trust and transparency in the value chain by working as a notarization of an agreement.
The bottom line is that apart from real-time monitoring of goods, blockchain ensures limited number of intermediaries, increased security and reduced volume of papers and emails exchanged, and this is what makes the present and future of the commodities industry.
2. Big data
Big data can help understand better the commodity ecosystem. It will help us understand the link between clients and suppliers. The goal of big data in commodity trading is to acquire more knowledge and expertise in the whole commodity value chain. Big data in commodities trading doesn’t mean to make an extensive and systematic use of collected data, but to strengthen and make the trading process more efficient. To take an example, commodity companies no longer have to wait days and weeks to understand market changes, analyze the alternatives and make decisions accordingly. This is possible using big data analytics. It will also help manage disparate data coming from multiple systems in the network. With predictive analytics, it will be easier to extract information from existing data sets and determine patterns to predict future outcomes and trends in the commodity trading industry.
3. Artificial Intelligence
The use of AI has already seen success in the retail trade, bringing a lot of relevancy to clients. Now in commodity trading also, the use of AI can have a huge impact. The AI algorithms in future could adapt to market conditions, learns from past experiences, reasons and accordingly makes trade decisions. This skill combined with computers’ ability to generate tens of thousands of trades per second will redefine the way things work.
The chart highlights various reasons to incorporate AI in commodity trading and transactions.
The adoption of these new technologies will not disrupt but enhance the commodity trading industry. These technologies will not negatively affect those merchants who are able to provide services and go further than a simple trading business. New emerging technologies will enable these merchants to re-intermediate commodity trade and finance platforms, which will become a tool for them to improve their services, by making operations faster and more secure.
