Commodities: the value in global, readily available information

After years of shifting regulatory environments, technological transformations and shrinking margins, commodity trading has come to a crossroads. Another industry reinvention is on the cards.

Traditionally, the success of traders depended on their capacity to combine accurately sourced prices at different locations with clever logistics, but that was then. The good ol’ days when the investment banks and trading houses wielded their consistent information edge over the competition are gone. Readily accessible information is available to almost anyone from a variety of online sources.

Transparency along the trading cycle

The wider publicisation of commodity data is a positive; markets are more transparent and accountable. The abundance of structured data, however, in the form of production figures, futures positions and rig counts, has reduced their relative value.

The trend has legs. VAKT, the blockchain-based trading ecosystem that launched last year, represents an ambition to further upend the way commodity operations function, boosting transparency and integration as ‘a single source of the truth for the trade lifecycle’. It is probably too soon to forecast its impact, but it speaks to how dynamic the underlying commodity market is. We submit that serious commodity players will necessarily be examining technology investment and innovative thinking to gain or maintain an edge.

There’s data and there’s dealing with data

The capability to deal with a host of new unstructured data becomes rather crucial. As merely one example, machine learning is conspiring with growing computational power to bring satellite images into commodity decisions. If you’re a trader who relies on annual crop acreage reports, the ability to get a weekly view of crop types and growth progress supercharges the accuracy of your yield estimations and price forecasts.

For now, such data is expensive to acquire and frequently unavailable to the public. Hedge funds such as Two Sigma, Renaissance and Bridgewater have built new investment strategies on the back of data that others would struggle to acquire and process, but here too the information edge will be dulled over time.

Burton-Taylor Consulting’s annual report on market data consumption put a $30 billion figure on investment in information by the commodity/energy players, the hedge funds and the asset managers in 2018, the highest figure since 2008.

Proceed with caution and a spirit of experimentation

That big-picture number may not mean a whole lot to you, but the magnitude of investment required to build a top-level analytics capability is significant and requires commodity traders to take a different kind of risk than they may be used to, namely by experimenting with technologies and practices that are too young to be considered completely reliable. As such, economies of scale are bound to become more and more important as small and medium players baulk at a complex redesign of their operating model from scratch. We can expect an energetic raft of joint ventures, mergers and acquisitions in the years to come, as competition around data becomes a main driver of change and digitisation makes for thinner margins.