The future of commodities trading
– cloud, connected devices, and blockchain –
What does it all mean and how will it impact global trade?
Physical commodity trade is one of the oldest business known to mankind yet some of the means used in this business have changed very little over the centuries. The issuing of contracts, Bills of Lading and invoices is still fundamentally paper based. These paper documents act as “bridges” between remote and unconnected computer systems such as email, chat, ERPs, CTRMs. Even the ways of finding and trusting new clients has changed very little over the past few decades.
The rise of e-commerce platforms.
This contrasts substantially to what we are seeing in the consumer goods industry with the rise of e-commerce platforms, which are taking an increasing share of B2C business.
The challenge of digitizing commodity trade is substantial, as there are many different trade counterparties one can choose from (as well as logistics providers) for every single deal. However, the rise of new technologies such as Cloud computing, Internet of Things (IoT) and Blockchain will radically change this.
When we order books, clothes, electronics goods from the likes of Flipkart, Amazon or Alibaba, we do not expect them to send us a contract in the post, or original shipping documents via DHL! Instead, the process is fully automated — the contract is digitized, the invoice electronic and the progress of the shipment is automatically updated via email (or directly on the app). This ease of use and efficiency is what is moving millions of consumers away from buying at stores, to buying on global platforms.
But what about commodities trading, that is far more complicated?
Technology has been the enabler of e-commerce — advancement of hardware devices, the upsurge of mobile, and cloud computing, but for the commodities industry the challenge is far larger.
There are complicated multi-modal supply chains that move goods from the producer to consumer. Importantly, it is often necessity to search many counterparties to check on availability, price and quality of goods. Afterall, only in this way can you find the “best deal”.
New technologies like Cloud, Blockchain and Internet of things (IOT) can eliminate many problems related to locating suitable goods, counterparty risk, and data security. These technologies will transform the whole commodity cycle — Imagine a world where devices are interacting with each other to monitor product demand. Where this data is transferred automatically to manufacturing units which in turn automatically adjust the production targets, inventory levels, and automatically order commodities. This all this sounds like a Science Fiction today but is possible in the not too distant future.
A few definitions…
Cloud computing is the on-demand availability of computer system resources, especially data storage and computing power, without direct active management by the user. The term is generally used to describe data centres available to many users over the Internet. Large clouds such as Amazon and Azure dominant today, where servers are distributed over multiple locations.
The Internet of Things (IoT) is a system of interrelated computing devices, mechanical and digital machines, objects, animals or people that are provided with unique identifiers (UIDs) and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction.
A blockchain, is a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, with transaction data. Blocks are connected via nodes. Nodes allow companies to own and control their own data, whilst at the same time share selected data across the network.
So how can Cloud, IoT and Blockchain help change the commodities trade today?
Cloud computing allows us to search, negotiate and conclude contracts with a network of users. Just like we are able to find an apartment on AirBnB, we can find aluminum scrap or copper cathodes in the same way. A growing network of buyers and sellers all sitting on the Cloud can connect with each other to find the optimal trade.
The concluding of deals on the Cloud creates a digital bridge between the seller and the buyer. It’s set out rules which can then automate processes such as inspection, booking transportation and documentation.
By connecting IoT devices, we can track physical goods, through the life-cycle of the contract — from dispatch to delivery. Furthermore, we can associate the physical goods, with specific contracts and transport arrangements.
Blockchain records all of these interactions securely and privately. It can allow the sharing of information to finance providers, shipping agents and customers, automating the trade-cycle.
What we end up with is not just platform where we can conclude business with previously unknown (or unfamiliar) counterparties, but one where different platforms providing different services can interact. Where a booking platform, can connect with a KYC provider, a finance platform, or freight platform — sharing common, validated data, seamlessly.