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Commodities Trading in 2025: 5 Predictions

    Give Commodities some Moore’s Law:

    According to Intel co-founder Gordon Moore, he observed in 1965 that transistors were shrinking so fast that every year twice as many could fit onto a chip, and in 1975 adjusted the pace to a doubling every two years.

    This has seen tangible benefits in various sectors ranging from personal communication devices, transport, banking and retail. It would be easy to overlook the raw material industry as it is unobtrusive (and probably not as visible or on the radar of the millennials).

    The age of digitization in the commodities sector is here, and it is how not when digitization will come into manufacturing and the #commodities industry. What was a source of competitive advantage in the past is evolving. In this new economy, the biggest risk facing incumbents and existing players in the industry is that of inaction.

    This simple rule would have important implications in the technology revolution in the commodities industry and shaping its future.

    Here are my views on 5 areas where we’ll see a huge transformation in the way we trade commodities/raw material.

    1. AI and Predictive Analytics

    Picture a trading floor in 2025: A trader (human-assisted or algorithm) will be able to execute a trade physical coal to a steel mill.

    First, the trader will scan and collate interest (demand), and find out the amount of stock (supply) on hand. Based on the customer’s requirements (past and predicted), the trader will put forward the offer. Once it is accepted by the customer, it will be confirmed and recorded automatically.

    In the same way as to how predictive medicine and deep learning can alert doctors to disease more accurately, this could be applied to the commodities industry.

    2. Super Just-In-Time

    If the vision of Industry 4.0 is to be realized, most enterprise processes including the supply chain must be digitized.

    The current supply chain is highly fragmented with each silo of manufacturing, marketing, distribution, R&D. Digitization allows each of these functions to communicate and transform into an integrated ecosystem that involves all parties.

    For example, an Australian iron ore manufacturer could:

    • Get updated demand on customer requests or demand scenario
    • Load cargoes automatically using self-driving trucks and vehicles
    • Send out vessels to reach destination ports in China (taking into account voyage time)
    • Or, organize floating warehouses which enable adjustments and real-time reactions as conditions or requests change
    • Process documentation easily online
    • Monitor and reward firm and employees performance and sales records accurately

    3. Smart Contracts

    Not necessarily… [gasp!] on the Blockchain

    Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman. Coined by Nick Szabo in 1994, way before any “blockchain revolution” he was ahead of his time.

    Blockchain technology is still nascent, and whilst there are benefits to disintermediation, physical commodity trading may need the flexibility that may not be suited to the blockchain. Furthermore, this would allow firms to tap into existing technologies at a lower cost and more quickly than if they were to develop their own solution on a blockchain.

    Imagine this scenario (same iron ore manufacturer):

    • Once the order for a Capesize vessel loading in December 2018 has been confirmed, a contract between the producer and consumer will be issued automatically
    • Contracts would be signed and recorded in the cloud for all relevant parties to view and/or act on
    • Reminders would be issued nearer to the date and vessels will be booked and vetted
    • Loading commences and payment is released by the buyer
    • The vessel is tracked all the way to discharge port

    4. Personalization on Scale + Consumer Empowerment

    The new commodities landscape should utilize technology, and focus on the customer.

    As technology improves, each party on the supply chain would need to demonstrate value.

    Consumers of raw materials are currently larger conglomerates or manufacturing firms who already have a process in place. In the future, end-users could represent smaller firms (or even individuals).

    For example, take a household (for electricity):

    • They have solar panels installed on their roofs and a meter with their preference input (split of type of energy based on their budget or based on the season for instance).
    • When they are close to the limit or require more energy for heating or air conditioning, a demand signal is sent through to a procurement system.
    • This then triggers energy suppliers (could range from solar, wind, coal providers) to fill this end-user order.
    • On the flipside, houses with surplus energy, could also become sellers and offer their credits of electricity to another house at a certain price.
    • Over time, each household has its own consumption patterns which can be analyzed based on district etc, but rich consumer data will allow for personalization on a scale not yet seen before.

    5. Shared Ownership

    The average cost per mile of UberX is probably around $1.50 (€0.84/km). It already costs more than that to own a car in some places.

    In New York City, car ownership works out at around $3 a mile. At current rates, in most metropolitan cities, it seems cheaper to use Uber than own your own car.

    In the same way, firms are aiming for leaner teams (read: cost-saving) and incorporating SaaS functions in their day to day as it seems much cheaper and more efficient for them to do so. For example Xero for accounting, and Stripe for payments and billing.

    This would probably mean commodities firms could use services such as operations and risk management software to save a huge chunk of cost and improve profit margins.

    Bottom Line:

    It is an exciting time to shape how commodities can fit into the new ecosystem, and Helixtap aims to be a part of this.

    In the (very near) future, the way we think about everyday products that commodities supply and power could change. Instead of viewing them as products, each of these items become platforms in which various services can be offered and rendered.

    Published on Medium