At Gen 10 our mission is to make our customers’ daily lives more efficient and productive whilst reducing the possibility for operational and financial risk errors that are so prevalent and costly to the point of corporate failure, in the complex world of commodity trading and supply chains. This is never more true than in the current extraordinary circumstances created by the Covid-19 crisis, where the financial and physical dislocation of commodity markets has already lead to a number of high profile trading company collapses.
Our cloud technology allows clients to capture and manage their myriad internal and external data flows in smart workflows that truly reflect a company’s physical and financial tasks. The aim – integrated digital transformation of all the core functions of commodity trading, shipping logistics, quality management, financing and risk management; so that no critical operations have an independent “ex system” life of their own on spreadsheets.
We call this “Work Better. Together”. In today’s Covid-19 operating environment this has rapidly become a question of Work Better Together – Apart.
The immediate impact on commodities
We have been on a couple of industry calls in the last 10 days where it is becoming clear that a number of critical issues play into this trend:
The lockdown, physical restrictions and remote working are putting massive strain on companies’ systems, operational risk management and Business Continuity Planning processes. The lower tier companies are likely to be the most at risk and are most squeezed on credit lines. They are being put on watch by funders and supply chain partners, especially by down-stream processors and brand holders.
Access to USD credit lines are becoming squeezed and are more expensive. The major banks have a huge exposure to major sectors – especially the oil / energy complex with major credit defaults in Singapore oil trading rapidly reducing bank appetite for commodity credit. This is spilling over into ags linked to the energy complex – especially biofuel related commodities like corn, palm oil and sugar.
All of which will open up opportunities for well-structured and risk-managed commodity finance in the next 6-12 months, but credit lines will only be made available to those businesses that can truly demonstrate (probably in real-time) to their banks that they have all aspects of their operations and financial risk management under control. Having the right processes, systems and governance in place is going to be critical to survival. Traders of course do not like sharing detailed information on positions and risks, but it is probably going to become necessary if they want access to the life blood of funding.
Liquidity risk once again is a big concern, as is access to warehouse capacity. Indications are that the most robust players are trying to increase their short-term liquidity position from 15% of annual working capital needs to 25% to have a working buffer.
Critical bottlenecks in the financial and physical supply chain are being monitored much more closely with freight / port availability, insurance, credit and contract risk (force majeur) all of major concern.
Traders have seen the window for offering firm pricing shorten from 24-48 hours to less than 6 hours because volatility is again putting pressure on information. Mid to long term price forecasting appears futile right now and so focus is moving to forecasts that are short and simple. With many traders having problems finding the liquidity to financially hedge safely, the focus on operational risk is rapidly increasing.
How do we respond to the crisis?
The normal response to the crisis is pretty reactive rather than proactive and that is not surprising. However, as the initial crisis recedes there will be a need to invest ahead of future events that are likely to follow, and could include a second phase of Covid-19 infection. Companies that have been caught out by recent events and that have gaps in their systems or ability to work remotely are already scrambling to cover these.
Whilst there is contingency planning more readily available for financial / treasury / trading / risk management activities, for physical factory / processing operations there is no alternative – so focus is shifting to strengthening supply chain resilience, reducing operational risk and securing critical spare parts.
Most of the commodity trading and processing companies we are talking with are accelerating their investments and they are focused on closing gaps in operations, office / finance / risk management, supply chain, IT and comms. Never has our tagline of “Work Better. Together” been more critical and pertinent.
A rapid pace of change
An interesting consequence is that clients are looking to make rapid decisions to improve critical parts of their business process and not change their overall CTRM system. This plays strongly into the trend for ecosystems of apps that solve discrete problems and that can be plugged into existing ERP systems and implemented remotely. This is at the core of Gen10’s philosophy and business proposition.
We think that the current crisis is going to significantly accelerate the digital migration of companies in commodity supply chains because dire need will drive innovation. It seems likely that it will be driven by solving the most urgent and critical issues first and app by app, as opposed to unwieldly, expensive and high-risk total system replacements. Needs must, and perhaps digital transformation will happen in a much more organic and bite sized manner than has been thought of until now.
Of course no one knows the future of technology and business but we are sure that in the immediate future never will the need to work better together whilst apart be more critical to survival and thriving in commodities.
At Gen10 we are ready and committed to help you to this end.
Stay safe and well.
Want to read more?
Subscribe now for monthly updates