the dawn of a new era - unige international trading · global trade volumes are on the rise....

CommoditiesSPECIAL EDITION | 2018

The Dawn of a New Era

Latest deveLopments A closer look at key commodity classes

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new Business modeLsBuilding streamlined supply chains

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the rise of CommoteChHow technology is transforming trading

researCh & innovationActionable thinking to serve the hub

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speCiaL edition | March 2018 | Commodities

Contents - marCh 2018

editoriaL

The dawn of a new eraGlobal trade volumes are on the rise. According to the WTO and despite moderate global GDP growth over the period, “world merchandise exports have increased in value by about 32 per cent since 2006”. Over those ten years, the value of manufactured goods exported has increased by 37% and that of agricultural products by a whop-ping 67%. With a 10% lower value to the level achieved in 2006, fuels and mining products were the only exceptions to the trend, due to a tumble in the price of crude oil. 2017 turned out to be a remarkably good year for world trade with a 4.5% year-on-year growth reported by the CPB World Trade Monitor whilst global GDP growth reached 3.6%. The latest World Trade Outlook In-dicator points to a sustained trade growth in the first quarter of 2018 – with the throughput of container ports showing a clear upward trend –, and the IMF is forecasting global GDP growth of 3.7% for 2018. Significantly, we are observing the dwindling of the once much discussed “secular stagnation”. The period when economic predic-tions were regularly revised downward seems to be over. At least for the time being.

Trade wars and protectionism make great head-lines but US import taxes on steel and aluminum are hardly news. George W. Bush and Barack Obama both applied similar measures (although more discriminately) and the EU has both ac-commodated and introduced comparable trade distortions in the past. Commodity traders cannot dismiss political noise but the outlook seems more favourable than it has in years. To quote a recent paper by Kenneth Rogoff, for-mer chief economist of the IMF, “the best bet is that AI and other new technologies will even-tually come to have a much larger impact on growth than they have up to now”. The progress of productivity has declined drastically since the mid-90s (in particular in the US) but according to some, we may well have been on the outset of a J-curve. In other words, we may by now be at the beginning of a very steep rise in productivity and economic expansion. Innovation and opportunities are impacting the entire commodities industry. Blockchain and other technologies are streamlining transaction workflows, creating efficiency gains and better

resilience. There are countless initiatives in agri-culture and the food industry, from algorithmic models for precision farming to new proteins. Pe-rhaps more importantly, technology may reshape the potential of traceability which has moved at the forefront of consumer concerns. Business mo-dels are also evolving and competition changes shape as new players emerge.The Swiss commodity hub is at the forefront of transformation everywhere. Amongst the first to adopt new technologies and new business models, it also wants to lead the way on human rights. STSA was the first umbrella organisation in Switzerland to support the United Nations' Gui-ding Principles for Business and Human Rights (UNGPs) and to invite all its members to do so.

Nicolette de JoncaireEditor in chief Commodities & allnews.ch

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04. A sector looking to the future. David Fransen, STSA || STSA, a key actor at the forefront of the Swiss trading hub challenges Stéphane Graber, STSA

LATEST DEVELOPMENTS

06. Reshaping agriculture trade in today’s environment Gert-Jan van den Akker, Cargill Internationnal SA || Finding new trading opportunities in the oncoming electric-car revolution. Maximilien Deudon, Transamine Trading S.A.

07. After re-balancing, what's next for oil? David Fyfe, Gunvor Group || How trade finance banks are reacting to impending Basel IV. Paul-Emmanuel Aerts, ING

09. A review of the introduction of FinfraG. Fabian Klar, REGIS-TR S.A. || Implementing FinfraG. John Cummins, Six Group || MiFID II compliance: no one-size model. Jean-Noël Ardouin & Roger Disch, EY

10. Structural oversupply in shipping means only fittest will survive. Jonathan Le Feuvre, ABC Maritime

11. INTERVIEW. Roger Strevens | Trident Alliance: “robust implementation of IMO sulphur cap key for entire industry”

NEW BUSINESS MODELS

12. Keeping trust in a changed world of trade. Dick Taylor, SGS || New entrants harnessing innovation and new business models to revolutionise power sector. Danilo Bertocchi, Swiss Coaching Partners & Thomas Esdaile-Bouquet, STSA

13. 2018, the year AgTech reshapes production,monitoring and exchange of commodities. Arama Kukutai & Spencer Maughan, Finistère || The endgame for commodity traders begins. Alexander Franke, Roland Rechtsteiner & Graham Sharp, Oliver Wyman

14. Big data unlocking farmer’s potential. Cara Waterfall, ECOM Agroindustrial

15. INTERVIEW. Brent Wilton | The Coca-Cola Company: “How corporate social responsibility is driving new business models in international trade”

THE RISE OF COMMOTECH

16. Reinventing trade finance customers’ journeys. Christophe Cantala & Philippe Penet, BNP Paribas

17. Potential benefits for the use of blockchain in commodities trading. Alistair Cross, Mercuria Energy Trading

17. Machine vs. Mind: reconciling innovation with the human factor in trading. Guy-Laurent Arpino, Robert Serpollet, Paula Freire, Louis Dreyfus Company

18. Arresting entropy in commodities trading: towards a single platform model. Paul Dex & Mike Wilkins, Fidessa || On the many promises of AI. Prof. Stéphane Marchand-Maillet, University of Geneva

19. INTERVIEW. Julie Armstrong | CME Group: “The promise of “commotech” and how emerging data is reshaping commodity trading”

RESEARCH & INNOVATION

21. Tenth Trading Forum: bringing the industry together. Alvaro Aranibar, Studend MSc in Commodity Trading

22. How creating a deep talent pool has helped structure the hub. Silviane Chatelain, STSA

23. INTERVIEW. Dorothee Baumann-Pauly & Denis Ruysschaert | NYU Stern & SwissAid Geneva: “How the SRIC’s activities can have an impact on commodities trading”

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speCiaL edition | March 2018 | Commodities

david fransen

President, Swiss Trading and Shipping Association (STSA)

stéphane GraBer Secretary General, Swiss Trading and Shipping Association (STSA)

A sector looking to the future

A CHALLENGING OUTLOOK FOR THE COMMODITY SECTORIt has been an interesting time for commodity markets. Prices have generally risen over the past year making producers’ and exporters’ lives easier, encouraging investment and production. Econo-mic growth, coupled with a weaker dollar, is still strong enough to withstand higher prices, and demand continues to grow. As the world beco-mes wealthier most commodities will benefit and international trade, assuming a benign economic environment, will continue to increase.Energy, and notably oil, faces a different long-term future. Developments in renewable energies and bat-tery technology continue and we anticipate that they will begin impacting the demand for transport fuels in just over a decade. In the nearer term, however, the outlook for demand continues to look positive.

TECHNOLOGY – AN ESSENTIAL TOOL, BUT NO PANACEAPersonal relationships have always been at the heart of our business and remain critical today. Perhaps for this reason, compared with other sectors, the commodities sector has been slow to

fully accept the full benefits of automation and ability of technology to save time and costs.That said, a number of factors are likely to ac-celerate the uptake of technology in commo-dities. Competitive pressures and shrinking margins are highlighting the importance of efficiency. At that same time, regulation and increasingly rigorous compliance require-ments are increasing the complexity of the back office and incentivising the implemen-tation of technology. Thus, just as electronic platforms have replaced open outcry for the futures markets, the physical markets will slowly start to change. At present, there is much discussion about one particular solution, Blockchain, and how it can help our sector. Doubtless, there is scope to streamline the letter of credit and contracts processes, but the replacement of dollar or euro transfers by Bitcoin seems further away.

A SECTOR SUBJECT TO INCREASING REGULATIONI’ve already mentioned the increasing focus on compliance procedures and processes. This year, the introduction of MIFID II has been a particu-lar challenge for all companies using derivatives and futures for their hedging activities. Further-more, additional reporting requirements conti-nue to put more pressure on control and risk ma-nagement systems. These requirements will not diminish in the future.

THE WAY FORWARD FOR THE COMMODITIES SECTOR IN SWITZERLANDOur sector’s business practices are evolving in many aspects. A key part of this is our positive en-gagement with an ever wider group of stakehol-ders, often focused around initiatives or issues.The issue of transparency is the focus of both NGO’s and many parliamentarians. Payments to governments for the extractive industry are

already covered by legislation in the EU, in the US and also under EITI initiative. On the tra-ding side, the trading industry and NGOs are progressing well to define what should be de-clared in a way that will ensure the participation of the countries and their governments, the only way of ensuring that the underlying issue of cor-ruption is addressed.On the other hand, the Responsible Business Ini-tiative, notwithstanding its good objectives, has not been subject to the same level of scrutiny. Conse-quently it risks enshrining in Swiss law unreaso-nable or unworkable responsibilities for Swiss companies which may contradict laws in other jurisdictions in which they operate, placing them in an impossible position. We trust that working together will be able to address these issues. A good example of this positive collaboration is the Guidelines for the Commodity Trading Sec-tor on implementing the UN Guiding Principles on Business & Human Rights, which will be published by the Swiss authorities in 2018 and which demonstrates Switzerland’s commitment to moving forward. Likewise, a new review of the Background Re-port on Commodities first published in March 2013 is due later this year. This has been a good roadmap for the key points of the discussions for our sector over the last five years.It is also worth reflecting that Switzerland faces challenges from other trading centres. At pre-sent, it is clear that whilst Switzerland is expen-sive, overall it is still a good location for trading companies. The sector will continue to thrive in Switzerland despite high costs as long as the bu-siness environment remains competitive. Laws, regulation and taxes must be consistent with other jurisdictions, and enable companies to work effectively and efficiently, whilst respec-ting global business standards. Let us hope that working together we can achieve this.

Change is accelerating across the commodities sector, from commercial context to technology and regulation, the sector faces anunprecedented pace and scope of change

THE SECTOR WILL CONTINUE TO THRIVE IN SWITZERLAND DESPITE HIGH COSTS AS LONG AS THE BUSINESSENVIRONMENT REMAINS COMPETITIVE.

STSA, a key actor at the forefront of the Swiss trading hub challenges

More than ever, in today’s challenging and fast mo-ving environment STSA has proven to be of great value to its members. STSA continuously helps its

members to foresee future industry challenges from a holistic point of view. As the commo-dity trading sector faces unprecedented rate and scope of change, companies need to adapt their business models to a new reality. Pushing for more streamlined supply chains and competing with new entrants, like GAFAM or Tesla, will become the norm. These new players who bene-fit from cutting-edge marketing skills and have privileged access to consumers are looking to use their competitive advantage to master the supply chain challenges. Some examples that were re-cently in the headlines were Apple announcing its ambition to source cobalt directly from the miners, Tesla significantly expanding its energy

storage capabilities in Australia and the purchase of Whole Foods, one of the largest groceries sup-pliers in the US, by Amazon.In the face of such challenges, STSA provides a platform, which allows its members to leverage individual resources and address common issues faced by the industry by following the old adage “Strength in unity”. A perfect example of this is the tremendous success of TRAFEC, an STSA developed platform that offers a secure commu-nication channel between trade finance banks and trading companies. TRAFEC has managed to sit everyone around the same table and pro-vide the industry tools designed to tackle cur-rent and future challenges. As technology moves forward and becomes more decentralised, asso-ciations like the STSA can bring the most bene-fit by offering a collective approach rather than individual one. As Switzerland finds itself at a regulatory cross-road, confronted with pressure from different fronts, a collective approach might also prove beneficial for the industry when it comes to Swiss regulation. New regulation on tax, com-pliance, human rights and sustainable supply chains threatens to severely impact the industry. Therefore, it is necessary to deal with extreme caution on how new and ongoing developments like TP17, MiFID II, FinfraG are implemented. STSA has been closely monitoring the political debate and actively contributing to technical discussions. Moving away from an international “level playing field” could severely hurt Switzer-land’s position as a trading hub, forcing compa-

nies to move abroad. When it comes to tracea-bility and transparency an increasing demand from consumers and NGOs has put pressure on regulators. STSA has worked during the last three years to build positive relationships with the authorities and related stakeholders to find fair and fit for purpose way to implement the UNGPs to the commodity trading sector.As new technology is developed, new regula-tion introduced, and pressure regarding CSR in-creases, most commodity trading companies will need to adapt quickly in order to maintain their competitive edge. As we move forward it will become increasingly necessary to get over diffe-rences linked to the diversity of actors, and work together as an industry. As we look to 2018, we are optimistic about the opportunities we see for the industry. STSA will have a busy year as we try to bring the commodity trading companies together and strengthen Switzerland as a tra-ding hub. The goal for STSA is to work with its members and the industry in general to navigate through these new developments as efficient as possible. Naturally part of this will imply conti-nuing to work closely with universities and sec-tor experts to ensure that the new generation of industry leaders receive world-class training. We are sure that once again during 2018 the industry will prove to be resilient, adaptive, and innovative. This new edition of Commo-dities magazine offers a look into the wide spectrum of subjects currently impacting our industry and in the scope of STSA’s focus. We hope you will enjoy the read.

WE ARE SURE THAT THE INDUSTRY WILL PROVE TO BE RESILIENT, ADAPTATIVE AND INNOVATIVE.

As the industry moves forward working collectively will prove to be key

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speCiaL edition | March 2018 | Commodities ||| LATEST DEVELOPMENTS

Gert-Jan van den akker

President, Cargill Agricultural Supply Chain President and Chief Executive Officer Cargill International SA

maximiLien deudon Trader, Transamine Trading S.A.

Reshaping agriculture trade in today’s environment

Food and agriculture compa-nies operate today in an increa-singly demanding environment in which disruptions to longs-tanding trade policy, changes in consumer preferences and requi-

rements, and shifts in production are steadily rearranging the world stage. We rely on trade to move food across borders to where it is needed most, and must conti-nually adapt to changes in the global trading system in order to feed a hungry world. To-day nearly one billion people worldwide rely on international trade to meet their basic food needs. And trade—rather than national self-sufficiency—has been the main factor dri-

ving the reduction in the percentage of the world’s population with insufficient food sup-ply over the past 50 years.Time also has proven that free trade—res-ponsible trade that takes place on a level playing field—is the most powerful engine of economic

prosperity. Guided by that rules-based system, world trade increased more than 150 percent between 2000 and 2014 alone, growing from US$4.8 trillion to US$12.2 trillion.But like everything else in this world, we know that trade is imperfect. Its benefits are not always evenly distributed. And when that happens, perceptions may shift, causing trade to serve as a convenient scapegoat for econo-mic hardship, even when those hardships are due to technical advances, shifts in consumer demand or other factors. Policymakers often respond to these difficul-ties with restrictive trade policies, in spite of the fact that the real issue is that trade is facing new demands imposed by a changing world, and that existing trade agreements must be adapted—not scrapped in favor of harmful restrictions. Simply put, open trade feeds the world. It ge-nerates agricultural jobs, and ensures export markets for farmers, producers and processors. And on the broadest scale, it works to culti-vate peace and prosperity by helping us share talent, ideas and markets. That is why we must protect these benefits by ensuring that we have an equitable, rules-based system—mo-nitored and enforced by the WTO—to keep trade open and flowing. We know it takes more than good trade policy to keep the wheels of trade moving. We also must pay close attention to evolving consu-mer attitudes and preferences. Consumers to-day put greater emphasis on sustainable and responsible production—wanting to know where and how goods were produced, and who produced them. The broad range of food choices demanded by

today’s consumers also put greater demands on the supply chain. And when foods go in and out of favor—whether based on new health data or simply the latest fad—production and global value chains must be prepared to adapt. The same applies to economic-based shifts in consumption, such as the increased demand for protein in Asia.Many innovations are being applied or are under development to address consumers’ growing desire to know the source of their food, to support farmers and to improve pro-ductivity, as well as responsibly and sustai-nably manage land use and natural resources. Last year, for example, Cargill launched a pi-lot project that uses block chain technology to allow consumers to trace turkeys back to the family farmers that produced them. We are also working to build a 100-percent traceable and sustainable palm oil supply chain by 2020. We are making notable progress with over 50 percent of the palm we source being traceable to plantation and we are continuing to seek ways to improve. New solutions aimed at meeting the world’s growing demand for food are also being de-veloped. These include the development of new protein products like cultured meat, im-proved aquaculture techniques, and disease- and drought-resistant grains and field crops to meet changes in climate conditions around the world.These are only first steps. The global food sys-tem will need to continue to innovate, embrace new technologies, and implement a diverse ar-ray of models to meet the world’s growing de-mand for food—and to attract new farmers to satisfy that demand for future generations.

THE BROAD RANGE OF FOOD CHOICES DEMANDED BY TODAY’S CONSUMERS ALSO PUT GREATER DEMANDS ON THE SUPPLY CHAIN.

Finding new trading opportunities in the oncoming electric-car revolution

New trends and technologies can create a new opportu-nity environment for trading houses. The rise of the elec-tric vehicle (EV) is clearly a significant shift in the auto-

motive industry, and appears to be the first sus-tainable answer to some major environmental challenges facing the global community. Elec-tric vehicles had a record-high sales in 2017, creating excitement in addition to subsidising and encouraging people to change old habits. Governments, including those in China, India, France and the UK, have decided to implement new guidelines to regulate or ban the sale of vehicles powered by fossil fuels in the next 15 to 20 years. The batteries that will power the vehicles they drive will require new sources of metals in high quantities. Sourcing these battery raw materials -- copper, cobalt, lithium and nickel -- is beco-ming of some critical interest to large battery producers like Panasonic, but also for the bat-tery-compound makers like Umicore or BASF, foreseeing volume increase and market share to be captured. Some of these metals, sometimes left over from mining other minerals, saw their prices more than double in less than a year. Cobalt's monthly average price per metric ton in

December of 2016 was US$ 31,788 compared to US$ 72,589 a year later. A ton of lithium carbonate on the Chinese market was quoting around US$ 18,000 in December of 2016, and was up to US$ 25,000 a year later. These attrac-tive prices started to motivate governments and entities owning these resources, and the people with the ability and expertise to extract them. While cobalt is mainly present in the Demo-cratic Republic of Congo’s Katanga province, lithium is found in Chile, Argentina, Bolivia and China’s salars under its brine occurrence and in Australia and Canada for its mineral pegmatite consistence. Different appearances require different refining techniques and in-frastructure. If brine refining produces a chea-per-to-produce ton of lithium carbonate, the process remains more time-consuming com-pared to a ton of the same material produced from a mineral concentrate. Although established mining companies are already extracting minerals in these regions, there is still room for experienced physical merchants who can bring their expertise to the supply chain. The growing lithium envi-ronment still needs optimisation and impro-vements in logistics, marketing, financing, and hedging. From an operational perspective, the white metal is historically more chemical than me-tallurgical, so most players differ from those in the usual non-ferrous environment. But there are similarities that can be shared in terms of exploration, extraction and trans-portation. The wide variety of spodumene and brine qualities justify the role of the mer-

chant who can source the most adequate pro-duct mix for smelters. From a financial perspective, mining these strategic minerals is cash intensive, and spon-soring is hard to secure for some junior miners, especially for commodities that are delicate to hedge due to illiquidity. A trading house can help mining projects to go live by providing financing facilities, and by supporting the London Metal Exchange initiative in the launch of a lithium contract, which will bring more transparency and liquidity to the market. Finally, it is important to realize that the EVs transition still bears many unknowns. There is strong interest, but not yet a need. And today's

growing demand is mainly supported by sub-sidies provided in the major EVs consuming areas like China. A government that relies heavily on revenue from fossil-fuels taxation will have to find a balance with the true cost of EVs. Technologies still need to be test pro-ved, and the standard one has not been found so far. Battery size, and cathode / anode che-mistry are the topic of significant scientific debate. The final outcome of that debate will determine the actual commodity demand.

THE WIDE VARIETY OF QUALITIES JUSTIFY THE ROLE OF THE MERCHANT WHO CAN SOURCE THE MOST ADEQUATE PRODUCT MIX FOR SMELTERS.

ALTHOUGH ESTABLISHED MINING COMPANIES ARE ALREADY EXTRACTING MINERALS, THERE IS STILL ROOM FOR EXPERIENCED PHYSICAL MERCHANTS WHO CAN BRING THEIR EXPERTISE TO THE SUPPLY CHAIN.

SIMPLY PUT, OPEN TRADE FEEDS THE WORLD. IT GENERATES AGRICULTURAL JOBS, AND ENSURES EXPORT MARKETS FOR FARMERS, PRODUCERS AND PROCESSORS.


david fyfe

Head of Market Research and Analysis Gunvor Group

pauL-emmanueL aerts

Country Head ING

After re-balancing, what's next for oil?

STUBBORN MARKET SURPLUS, BUT REBALANCING WELL UNDERWAY A sizeable inventory overhang from OPEC’s 2014-2016 market share “grab” is gradually diminishing. OPEC and Russia, amid collapsing revenues, spent a remorseful 2017, cutting oil supply by 1.8 mb/d, with reductions due to run through 2018. From $55 in autumn, Brent crude hit $70 in January, though prices may soften in 1H18, amid seasonally weaker demand and refinery maintenance. There is more OECD stock to be drawn too, before the word “surplus” is erased from the short-term narrative. So, after short-term rebalancing, then what? Here opinions diverge: might lower production costs, “imminent” peak demand and abundant US oil sup-ply anchor prices nearer $50 than $100? Or do three years of upstream spending cuts and robust emer-ging market demand tighten spare capacity, cyclical-ly inflate costs and again see geopolitics raise prices?

PEAK OIL DEMAND WILL HAPPEN, JUST NOT ANYTIME SOON Mid-2000s talk of peak oil supply has morphed into an obsession with peak demand. The Paris agreement, electric cars and de-carbonization, are in vogue. The energy transformation is real enough, but equally, the “commentariat” is sometimes guilty of transposing a developed world model of decli-ning oil intensity straight onto the emerging mar-kets. There, access to energy, industrialization and infrastructure build-out remain valid aspirations. In energy policy, neither one size, nor one pace, fits all. Oil demand will peak eventually, but not in the next 10-15 years. Short of revolutionary battery techno-

logy, electric cars may displace 2-4 mb/d of oil by 2030. That’s a fraction of what’s achievable by shif-ting to smaller vehicles (electric or internal combus-tion) and continued efficiency gains. Freight and air transport will rely on oil for decades. Reducing was-teful plastics use is laudable, but can the west simply prescribe low-consumption lifestyles to an aspiring middle class in emerging markets? Annual oil demand growth will more likely taper than collapse, trending from 1.5 mb/d today to below 1 mb/d in the decades to come. The job of neither upstream oil, nor a global trading system that connects producers, consumers, grades, qualities and refineries, is done quite yet.

UPSTREAM COSTS CAN’T REMAIN “LOWER-FOR-EVER” The bearish “new paradigm” combines peak demand with abundant supply, assuming that a 40% reduction in upstream costs since 2014 is entirely structural. True, oil majors have cut costs, and further equipment standardization and process digitalization promise major struc-tural savings in future. Recent frontier projects were sanctioned with break-evens reported below $50/bbl, largely thanks to good timing. Investing through the down-cycle, locking in low contractor and materials costs, na-turally reduces project break-evens. However, cost reductions are also partly cyclical, so next-tier pro-jects will be prone to cost inflation once activity levels increase. This is happening already for US shale. Labour, ma-terials and infrastructure constraints are pushing break-evens higher. Add rising interest rates, and lenders’ insistence that “shalers” finally generate free cash flow, and a prior focus solely on volume growth looks sub-optimal. Sharp 2017/2018 US production gains represent recovery from 2015/2016 lows, but may not be re-plicable long term. US shale is transformative, and will grow for years to come, but annual +500 kb/d growth may prove more realistic than +1 mb/d.

ARE SHALE AND SHORT-CYCLE PROJECTS ENOUGH?“Surplus-supply” adherents also contend that price and demand uncertainty imply IOCs will henceforward prioritize short-payback vs. long lead-time investment. Research suggests 2017 upstream FIDs were double the 2016 total, but involved half the oil, and 36% less capital, than before the price crash. Hesitancy to commit multi-billion dollar outlays for delayed payback is natural amid a policy nar-rative stressing peak demand, low carbon futures and stranded assets. Some argue that new OPEC supply, a guaranteed +1 mb/d per year of US shale, plus a bit of IOC infill drilling and EOR, will cover decelerating demand growth. But to-day’s justifiable caution doesn’t necessarily reflect a rigid corporate strategy for the decades ahead. Things can change.

MORE LONG CYCLE OIL WILL NEED HIGHER PRICESThe “perpetual surplus” view also overlooks so-mething. Upstream investment isn’t only about sa-tisfying 1 mb/d demand growth: it’s also to offset relentless mature field decline. Conventional crude production capacity loses 2.5 to 3 mb/d each year. So the upstream industry needs to generate fully 4 mb/d of new capacity annually to stand still. US supply growth may ease post-2018, amid sec-tor consolidation, increased financial discipline and rising costs. If shale grows at half this year’s expected +1mb/d, and geopolitical risk impedes OPEC capacity gains, short-cycle projects alone will not fill the eventual gap, even as demand growth slows. There’s plenty new oil in the pipeline for 2018/2019. Thereafter, meeting demand growth and countering decline needs new big-ticket invest-ment. With tighter drilling, labour and materials markets, some of the new oil needs cyclically hi-gher prices. And as ever, it also needs a flexible and robust trading sector, to store, refine and ship these barrels to evolving markets worldwide.

ANNUAL OIL DEMAND GROWTH WILL MORE LIKELY TAPER THAN COLLAPSE, TRENDING FROM 1.5 MB/D TODAY TO BELOW 1 MB/D IN THE DECADES TO COME.

How trade finance banks are reacting to impending Basel IV

Although many aspects of the “Ba-sel IV reforms” and their conse-quences on the profitability of European banks still remain to be clarified, there is a new para-digm that bankers have already

got used to work with in the past few years: their business going forward is most likely going to be less profitable than it used to be, unless they rapidly adapt to a changing world. This is particularly true in specialized financing like trade & commodity fi-nance, where the introduction of "output floors", a concept very much supported by the US members of the Basel Committee, is expected to result in ad-ditional capital required for trade finance banks by a factor of 2 to 3, if not more, depending on their pre-existing internal models. In itself, an increase in capital requirements may not be an issue for a commercial bank: a natural solution to adapt to a higher cost of capital, while protecting a similar level of profitability and still attracting sufficient capital to operate, is to pass it on to its clients through higher spreads... In the case of trade finance banks, this option may however be harder to achieve for two main reasons:• First, financial costs are an important part of the value chain in commodity trading. A substantial increase in those costs would probably result in a contraction of trade flows, or at least in a concen-

tration in the number of actors to those who can attract funding at a competitive costs, e.g. through the debt capital markets directly, as is the norm in disintermediated financial systems, notably in the US. • Second, it might simply prove difficult for many banks to increase their capital base further especially after the huge efforts already made af-ter the 2008 crisis, among others to comply with Basel III principles. As an illustration, French banks have already doubled their capital base since the crisis. So, what can the trade finance banks do to adapt to the new regulatory environment they are likely to be confronted with? There are funda-mentally 2 main alternatives that banks have started to explore: 1 – The “tactical solutions”: An easy answer to the anticipated changes is to focus on those clients and deals that are already profitable enough today, to compensate for a material uptick in the cost of capi-tal allocated in the future. Mid-size trading compa-nies, whose financing is often transactional, may be the first impacted by this increased selectivity. They still have powerful cards to play to remain attrac-tive for their banks. One of them, being to do more than just borrow funds from them. “Cross selling” of products is part of the tactical solution for banks to extend the revenues base on their clients while still allocating the same amount of capital, and if most of them are already well advanced in organi-zing their business activities “beyond lending”, it is a long term trend that is due to continue. 2 – The “structural solutions”: The increasing costs of capital for traditional banks is likely to accele-rate the implementation by the European actors

of a common Anglo-Saxon way of running their business through arranging and selling down most of the risks they originate. It may be a bit of a para-dox that a reform like Basel III, initially triggered by the financial crisis that came from the US and notably an excessive use of sophisticated technics to off-load risks from the balance sheet of banks, turns out to impose to traditional banks to adopt a more aggressive management of their own ba-lance sheets. This is however probably one of the only structural options to continue to operate at a sufficient level of profitability and with the same amounts of economic capital allocated. Of course the above orientations could change substantially depending on the final outcome of the Basel IV reforms. There still remains some time for the different stakeholders, including the Basel Committee and the ICC, to understand in details the impact of the envisaged reforms and adjust. Same goes for the banks which should “prepare themselves for the worst and hope for the best”. As one can imagine, a common consequence of the different solutions that trade finance banks will implement to adapt a changing regulatory environment is that the cost of financial services in the commodity trading industry is likely to in-crease going forward. This inflation will probably stimulate further the emergence of new ways of exchanging trade flows on digital platforms, as is already starting to be experienced in the industry through Blockchain initiatives. It is not the least of all paradoxes: a likely consequence of increased re-gulations may be that large part of the commodity trading flows are eventually re-routed to platforms that are cheaper and easier to operate, and ultima-tely even less (not to say not at all…) regulated.

THE INTRODUCTION OF "OUTPUT FLOORS" IS EXPECTED TO RESULT IN ADDITIONAL CAPITAL REQUIRED FOR TRADE FINANCE BANKS BY A FACTOR OF 2 TO 3.

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Jean-noëL ardouin, Senior Manager, Ernst & Young roGer disCh, Partner, Ernst & Young

A review of the introduction of FinfraG

The reporting obligation under the Financial Market Infrastructure Act (FMIA), also known as FinfraG re-porting, started on the 1st of Octo-ber 2017. Unlike EMIR, the Swiss Financial regulator (FINMA) de-

cided to phase-in the reporting obligation in phases, rather than adopting the “big bang” approach we saw ESMA take for EMIR. More than five months after the introduction of the first phase, and nearly three months after the second, this is proving to be a wise decision by FINMA. From a Trade Repository (TR) perspective, and in contrast to EMIR in Februa-ry 2014, the introduction went very smoothly and the different market participants seemed to be well prepared. Perhaps the fact that only two TRs were authorised helped with standardisation and clarity of choice for market participants. At the time of writing this article, the phases have not yet finished and there remain certain further steps to come. In addition to the phased-in approach based on counterparty classification, FINMA also decided to first introduce the reporting obligation for

Over The Counter (OTC) transactions and to delay the ETD (Exchange Traded Derivatives) reporting by six months. Whilst here OTC instruments are inherently more complex, and thus more complex to report, ETD instruments are normally shorter in duration and traded in much bigger volumes. With regards to the reporting itself, large financial counterparties (FC+) need to start reporting their ETD flows from the 1st of April 2018 and the small financial counterparties (FC-), as well as the large Non-Financial Counterparties (NFC+), will have to report their ETD flows from the 1st of July 2018. Public data, which is a mandatory requirement for TRs to publish, will therefore show an increase in volume of FinfraG reporting from July onwards, though the true picture will only be evident once small non-financial counterparties (NFC-) are re-quired to report, OTC instruments from 1st January 2019 and ETD instruments from 1st July 2019.Again, perhaps drawing on lessons learned from the implementation of EMIR, and recognising the need to give NFC- more time to implement, FINMA took the decision to postpone the repor-ting start date for NFC- in October 2017. Accor-ding to FINMA:“Some NFC- had mistakenly held out the hope that they could structure derivative transactions with fo-reign counterparties in such a way that they would avoid having to report such transactions” The above quote highlights that still today the concept

MANY NFC- MARKET PARTICIPANTS FOUND THEMSELVESUNDERPREPARED FOR THE REPORTING OBLIGATION.

MiFID II compliance: no one-size model

What are the main lessons learned with regards to the implementation of cross border financial rules over the past 12 months?With commodity market risk management tools and techniques advancing, the evolving convergence, glo-balization and dependency between physical and finan-cial markets has become ever more apparent. In this context, Swiss commodity trading firms have been and are still facing with different degrees of preparation an unprecedented wave of regulations spilling over from the financial sector.More specifically, the rules around precisely which firms fall into scope of MiFID II can be complex and require close consideration by firms that trade com-modity derivatives. The overall impact of MiFID II across firms is not uniform and depends on how the organisation is structured from a legal entity perspec-tive. In addition it will also depend on what hedging

or non-hedging activities they perform, how these are executed in the market (centralized versus decentra-lized hedging desks) and what regulated instruments are traded throughout entities and jurisdictions.While most of commodity trading firms may escape full regulation under MiFID II, there has been a nu-mber of extra-territorial effects for firms who trade in-scope commodity instruments, including adherence to regulatory position limits across commodity classes as well as the compulsory flagging and reporting of hed-ging and non-hedging positions in such commodities through investments firms (clearers, brokers) that are directly subject to MiFID II.

Looking forward, what should commodity trading companies look out for over the coming months?Commodity market participants comprise a diverse range of firms that include commodity trading houses, asset-backed traders (such as utilities and oil producers), commodity end-users and financial institutions such as banks or hedge funds. The size and complexity of these organisations can range from small regional players to large, global organisations with trading activities span-ning across multiple legal and regulatory jurisdictions.The extent to which such firms are experienced in dea-ling with large, complex regulations such as MiFID II is undoubtedly a key factor in terms of the ability to

successfully identify, assess and implement these regula-tions while minimizing impact to their business.Monitoring regulatory developments becomes even more important when considering the wider range of regulatory reforms (e.g. FMIA, EMIR, MAD, RE-MIT) together with their intricacies, interdependencies and operational implications for systems and processes. It is therefore important to understand the linkages between these regulations, their corresponding interac-tion and the potential knock-on effects depending on the intent, nature and volume of traded derivatives.Another consideration, which applies regardless of whether a firm is MiFID II regulated or not, is the potential impact on market structure and liquidity for some commodity classes, brought by changes to the market mix, availability of instruments and cost of trading as a result of new regulation. Recent market changes included the ICE exchange moving some oil contracts to the U.S. in January 2018, while brokers also observed that some traders in energy contracts began closing positions on European exchanges and opening equivalent ones on US exchanges.Staying abreast of these market changes and their in-tended or unintended consequences is key to drive the necessary organizational and strategic response in order for firms to continue trading derivatives in financially regulated markets without disruption.

THERE HAS BEEN A NUMBER OF EXTRA-TERRITORIAL EFFECTS FOR FIRMS WHO TRADE IN-SCOPE COMMODITY INSTRUMENTS.

of “substituted compliance” is not in place and NFC- entities trading with non-Swiss counterparties still need to fulfill their reporting obligation under FinfraG. Looking back again at the implementation of EMIR for NFC- entities, there was a widespread expectation that the reporting obligation would be repealed before February 2014. It was not, and many NFC- market participants found themselves underprepared for the reporting obligation. Ha-ving given NFC- entities more time to comply in this instance, it is unlikely that FINMA will reverse or further postpone the obligation. Whilst the re-porting obligation adds a layer of cost to derivatives trading, one must remember that regulatory bodies frequently promise that the cost of compliance will always be exceeded by the cost of non-compliance!Even though the scope is limited to those transac-tions which NFC- conduct with non-Swiss coun-terparties, with nine months to go we recommend that, if you are impacted, you start planning now. Speak with your software providers and the TRs in order to get more information, for example, RE-GIS-TR has issued a generic FinfraG RfI response which can help market participants make an in-formed decision when benchmarking the services of one TR versus another. Whilst TR services are broadly dictated by the regulatory framework, they are not necessarily as homogenous as you might think and variance exists between service support and pricing.

IMPLEMENTING FINFRAGWhat are the main lessons learned with FinfraG implementation from a TR perspective over the past 12 months?Reflecting on the implementation to-date, the diversity of implemen-tation approaches and options for institutions to fulfill their reporting obligations has been broad. We observed that larger institutions ge-nerally started with the project early and greatly benefited by having sufficient buffer for optimization while low-volume institutions had a tendency to start very late.Feedback from our community can be summarized under the fol-lowing recommendations:a) A key initial decision for firms is whether to opt for in-house deve-lopment of the reporting interface to a trade repository or to avail of third-party technical solutions. Although large institutions due to their geographical and technical complexity develop own solutions, there is still a valid argument for keeping the reporting flows as simple as possible which reduces operational maintenance. Smaller institutions who have the option to choose either an own solution or work with technical providers need to carefully consider the total cost of ownership and the flexibility to be able to influence the reporting logic which can be often specific to the products traded.

b) As is often the case, while the main reporting scenarios are the pri-mary focus, one should not forget about secondary use cases such as how to deal with transactions incorrectly reported as terminated. This demonstrates the need for an active dialogue between the lo-cal regulators and the main reporting parties to ensure alignment between derivative trading practices and regulatory requirements.c) In contrast to EMIR regulatory reporting the single-sided FinfraG regime aims to reduce the reporting burden on the Swiss commu-nity. This however introduces additional complexity on categorizing each trading counterparty and having a process to maintain this data. Bi-lateral agreements with same-category firms can alleviate this complexity somewhat.In conclusion the main lessons learned are to plan in enough time for dealing with complexity such as counterparty classification, technical im-plementation and testing and to strive for a reporting mechanism that is well aligned with how trades are booked in firms' back-office systems.

Looking forward, what should companies trading in derivatives look out for over the coming months?The next months from a transaction reporting perspective will focus on the go-live of ETD reporting for FC+s in April 2018 and for FC-/NFC+s in July 2018. This work in principle builds on the existing

reporting mechanisms already put in place for OTCs, but often with different static data considerations. The current best practice being employed by Swiss institutions for populating ETD information where static data is not publically available is, specifically for interest rate swaps and options, to use default values. For more details please contact our support desk.Since the FINMA guidance 05/2017 mandated an extended transition period from April 2018 to January 2019, NFC- institutions have addi-tional time for the technical implementation. In this context we recom-mend NFC- institutions who are required to report, often due to the cross-border business which they are involved in, to consider availing of the delegated reporting provisions laid down in FinfraG. Based on a delegated reporting agreement with another institution who already has the technical processes in place this can be a more-cost effec-tive option for fulfilling ones reporting obligations. SIX Trade Repository has published a more flexible and attractive delegated service solution, specifically for non-financials which allows clients to fully delegate their reporting to an already connected financial institution whilst availing of system access to ensure regulatory compliance.Finally, similar to what has occurred in the EU, further evolution of the reporting logic and needed guidance from regulators will undoubte-dly follow in the coming months. John Cummins, Six Group


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Jonathan Le feuvre

Chief Commercial Officer, ABC Maritime

Structural oversupply in shipping means only fittest will survive

Ship Owners, Managers and Brokers have some interesting times ahead. Shipping is probably the purest exa-mple of supply and demand eco-nomics where supply is highly ine-lastic while demand is incredibly

volatile. And, for the majority of the past 20 years, it has been in an over supplied situation. As one would expect in an over supplied mar-ket, freight rates/charter hire are low. The pro-blem with shipping is that as demand increases supply cannot react quickly enough, since it takes about 2 years to build a ship, making rates rapidly increase. On the other hand, this lag of supply keeps new ships coming even after demand falls off a cliff ! This makes the supply and demand of the shipping industry extremely complicated. If we add the effects of super cy-cle caused by China joining the 21st century in the mid-2000s, where market exuberance, lack of discipline and “easy money” were the norm, we get to where we are today, in a mar-ket which is exceptionally over supplied, by as much as 300% in certain sectors.So what can we do about this over supply? Not build anymore ships sure would help but that’s not always possible and it doesn’t address the supply of vessels that we already have. The only way to rapidly reduce over supply is an

accelerated scrapping program and this is not happening for two main reasons: first, charter rates for old ships are roughly the same as new ones, so why scrap an asset that was paid off years ago. Second, many people will have to accept huge losses, and they are not motivated to do this. In certain cases/countries it would mean writing-off the industry. These reasons have led the industry to have a younger and, at the same time, a much longer lived fleet, crea-

ting the massive oversupply situation we are currently in. If we, for example, take the bul-ker market over the past 20 years, in 1999 the average age of the bulker fleet was 14 years old, however, today the average is only 9 years old. On top of that, bulkers in 1999 had an average scrapping age of 25 years; by 2009 this had increased to 31.5 years old. Looking forward, there are many things that will affect supply, demand and market prices for years to come but I would like to focus in on 4 of them:

FIRST, THE SWITCH OF ENERGY PRODUCTION AWAY FROM FOSSIL FUELS TO GREENER ENER-GY, if we look at what is happening in Europe we can see that this will have a huge impact. Roughly 15% of all the new cars sold have some form of electric propulsion, Denmark is currently producing 130% of their electricity by wind power, UK’s largest power plant swit-ched to 100% biomass, and various countries plan to be fossil fuel free over the next 7 to 30 years. Combine this with the increase of regionalised energy production, developments in storage capabilities and a diminishing re-liance on a national grid and we end up with a dramatic shift in the demand for shipping.

SECOND, TECHNOLOGY will replace things that are simple yet expensive to do. This is the reason why there is so much focus on dri-verless anything at the moment. Things like 3-D printing will seriously affect the consu-mer and Artificial Intelligence will decimate employment in sectors like banking, analytical studies, transportation, and trading. These will all affect the demand for shipping, forcing it to evolve into a more integrated part of the supply chain, meaning that being just part of the solution, would not be the solution itself.

THIRD, LEGISLATIVE CHANGES like the new International Maritime Organization (IMO) rules for bunker fuel capping sulphur content at 0.5% starting in 2020 or the implementa-tion of European Union Directive 2016/1164 in March 2019 will significantly increase ship-ping costs as fuel prices will increase and taxes will directly impact the freight rates. Rates are going up to pay for these changes as there is simply no more fat in shipping for the indus-try to continue to shield the charterers from these- as shipping has tended to do for nearly 40 years now. The cost of legislative changes can only be passed on, as there simply is no more money to give.

FINALLY, FINANCE. Banks in general are aban-doning the shipping sector making it the end of “cheap money”. The way we have financed shipping, as we‘ve understood it for a genera-tion, is now no more. Therefore, we need to find different ways to finance our ships so that our whole global trading models become fi-nancially viable. This is going to be multiface-ted and not one solution will be the blueprint for them all. It will involve more integration both up and down the supply chains with lar-ger industrial players owning/leasing ships in the way we’ve seen already in the courier business or aviation. Except for a few crazy years due to abnormal disturbances i.e. conflict or irrational market behaviour, shipping is a lower return stable business.

IN CONCLUSION, the future of shipping will see a lot of changes both in the short term and over the longer term evolution in the indus-try. Only those who are able and willing to embrace these changes will get through this. Should we fear this? No, we should embrace it. After all as Darwin teaches us, you either adapt or die.

SHIPPING IS PROBABLY THE PUREST EXAMPLE OF SUPPLY AND DEMAND ECONOMICS WHERE SUPPLY IS HIGHLY INELASTIC WHILE DEMAND IS INCREDIBLY VOLATILE.

LEGISLATIVE CHANGES WILL SIGNIFICANTLY INCREASE SHIPPING COSTS AS FUEL PRICES WILL INCREASE AND TAXES WILL DIRECTLY IMPACT THE FREIGHT RATES. RATES ARE GOING TO GO UP TO PAY FOR THESE CHANGES.

MANY PEOPLE WILL HAVE TO ACCEPT HUGE LOSSES. IN CERTAIN CASES/COUNTRIES IT WOULD MEAN WRITING-OFF THE INDUSTRY.


The 2020 global sulphur cap change is for many reasons the most significant en-vironmental regulation to date. A large part of that comes down to the cost of compliance – how well a company can mitigate that cost can have a significant bearing on its future success. If we go back to IMO Global Sulphur Cap imple-mentation issues on the, do you expect a high level of compliance and a level playing field? The fact is that nobody knows what the level of compliance will be. There is a huge incentive to cut corners and there are still grounds for concern on how well officialdom is prepared for enforcing a global regulation. That amounts to a po-tential risk to business; one that it is pru-dent to take the initiative to mitigate. Detection will be a key aspect how do you see this taking place, using which technology?The most effective means of detection and the only one that will definitely stand up in court is onboard inspection by a port state official, possibly combined with a sample analysis performed by an appro-ved laboratory. I believe the role of remote detection technologies will be mainly to help authorities to figure out where to focus their onboard inspection resources and to serve as a form of deterrent. Can we expect material sanctions as from 1st January 2020?Anybody that’s ever been to a dentist has heard that ‘prevention is better than cure’. Something similar applies with sulphur regulation – it is important to have dis-suasive sanctions for deliberate (gross) non-compliance because they serve as ef-fective deterrents. A few states have the possibility to levy fines that would re-move any financial benefit arising from non-compliance, however there are still too many states that either have pitifully mild sanctions and or have failed to make their position public and clear. What are the key steps for an orderly and effective implementation?Whether it’s the crew of the ship or the

port state inspection officials, one thing that’s vital for all concerned is comprehensive and effective training on the subject. At it’s most fun-damental it is still an industry that’s built around people. Even the most brilliant compliance or enforcement systems and technologies are useless without them. Apart from the training aspect, it is also important for authorities to make a clear distinction between deliberate and gross non-compliance and marginal inadvertent non-compliance. In the former case a vessel chooses a cheap, high sulphur non-compliant fuel and tries to save cost, whereas with the latter a vessel has bought full price low sulphur fuel and taken every precaution to be compliant, but due to measurement or contamination error they are found to be at, say 0.55%S instead of below 0.5%. The former is outright cheating and deserves to be dealt with harshly, but the latter, while it is the worst nightmare for a responsible operator it is insignificant in environmental and health terms and deserves a much more lenient approach. Authorities should focus efforts on finding and sanctioning the deliberate non-compliant cases. Is SOx only the beginning for the Trident Alliance?No, it’s also the only issue for Trident Alliance. It draws on the unified voices of its members. Those voices are unified because of the natural alignment that comes with being a single issue organisation. Aside from that, sulphur regulation is unlike any other environmental regulation in that most vessels will comply through their ongoing decision to consume compliant fuel, rather than by installing a piece of equipment.

Interview Elsa Floret

Can you give us some background on the Trident Alliance?The Trident Alliance was founded in 2014 as a group of shipping companies who share a belief in the robust and effective enforcement of sulphur regu-lations. Members believe that effective enforcement ensures high levels of com-pliance, which is in the aligned interests of the environment, human health and fair competition.Sulphur regulation, and the forthcoming 2020 global cap change in particular, re-present a level of compliance cost that is without precedent. At the same time the questions remain on how effectively the regulations will be enforced. There are positive indications that ano-ther significant change – a carriage ban for non-compliant fuel- will also come into being. The question now is really whether port states, who are on the front lines of enforcement, make good use of these new regulatory developments. Many policy makers mix up greenhouse gas and pollutant emissions. Which does Trident focus on?CO2 is the most significant GHG for most types of ship, however it is not the only significant emission to air. NOx and SOx, which are nitrogen and sulphur oxide emissions respectively, are the subject of intense regulatory attention too. Nitrogen emissions arise from the combustion pro-cess because there’s nitrogen in air and they are normally mitigated through engine de-sign changes. On the other hand, the most common approach to reducing SOx emis-sions is to switch to a fuel with a lower sul-phur content.Sulphur regulations are the sole focus of the Trident Alliance. Single issue orga-nisations have natural alignment among members on that single issue, which helps them speak with one clear and strong voice.

Before we address the issues around implementation, and drawing here on your experience as Global Head of Sustainability for Wallenius Wilhelmsen, do you believe there will be sufficient availability of low sulfur marine fuels? We believe that there will be sufficient quantities of compliant fuels for our ships. There are three main reasons for this. First, we do all our re-plenishing at major bunkering hubs; if there’s anywhere that will have compliant product available come 2020 it will be at those hubs. Secondly we operate a liner fleet which means that we know where the vessels are going months in advance. That makes planning fuel replenishment much more straightforward. Thirdly, because we can plan bunkering far ahead we can establish long term supply agreements with bunker providers with whom we have close and long standing relationships. Where can we expect difficulties and what solutions will have vessels then? There can be difficulties in technical, operational, economic and regulatory areas. Assuming the question is intended to refer to the former, one key challenge for the industry to come to terms with concerns compatibility issues with the new class of 0.5% fuels. These new fuels can be made from several different refinery processes, which is one of the reasons that they cannot be mixed. Maintaining segregated fuel systems becomes increasingly difficult the more different 0.5% fuels are carried onboard. Adding to the complexity is the fact that some fuels require fuels while others don’t. The risk of severe fuel system problems can be diminished through effective crew training and follow up. So are the new rules going to change the shipping industry? There’s no question about it: they absolutely will. Fuel is the lifeblood of shipping; nothing moves without it. If that fuel is changed then expect there to be far-reaching operational, technical and economic consequences.

roGer strevens | trident aLLianCe

Robust implementation of IMO sulphur cap key for entire industry

interview

ROGER STREVENS TRIDENT ALLIANCE CHAIRMAN & GLOBAL HEAD OF SUSTAINABILITY FOR WALLENIUS WILHELMSEN

2000: Engineering degree from the University of Dublin, Trinity College. 2012 - 2015: VP, Head of Environment at Wallenius Wilhelmsen Logistics (WWL)2015 - 2017: VP, Global Head of Key and Liner Accounts at Wallenius Wilhelmsen Logistics (WWL)2017 - Present: Global Head of Sustainability for Wallenius Wilhelmsen & Chair of the Trident Alliance (of which he is the founder)

The shipping industry has been going through significant

upheavals since the sharp drop in freight rates nearly a decade ago. Now the sector is poised for another major watershed moment, as new rules adopted by the International Maritime Organisation are set to drastically impact the very lifeblood of the maritime industry, i.e. the bunker fuels it relies on to power its vessels. This will impact ship owners, charterers and bunker fuel suppliers alike and will require intense preparation in the run-up to the 1 January 2020 deadline. Besides SOx emissions regulations and fuel quality, ballast water management, as well as energy efficiency of vessels and upcoming CO2 emissions rules are all under discussion at the international level.STSA has been closely monitoring the discussions, sending representatives to the key IMO’s Marine Environmental Protection Committee meetings held in London in 2016 and 2017. It has also organised exchanges with experts to help inform the members, notably with the Trident Alliance in November 2017. At the Swiss level, STSA has been actively working with the shipping working group on two main topics. One work stream focuses on the assessment of the size and structure of the shipping industry in order to inform the public about the importance of the sector for the Swiss economy and its central role in the commodity trading cluster. The second work stream concentrates on the introduction of a tonnage tax in Switzerland by informing about the positive effects that such an internationally recognised standard will have on the Swiss maritime sector that is facing unprecedented challenges.

FOCUSING ON THE POLICIES THAT MATTER

speCiaL edition | March 2018 | Commodities ||| NEW BUSINESS MODELS

diCk tayLor

Oil Gas and Chemicals Global Data Services Manager, SGS

Keeping trust in a changed world of trade

As we are all aware, technology is increasingly impacting not only our daily lives, but the way we work as well. The growing in-fluence of new technologies, such as Machine Learning, Artificial

Intelligence, sensor technology, and perhaps most of all the combination of all of these usually referred to using the portmanteau of “Big Data “is perhaps the most fundamental change to business in decades. Using the modern terminology, SGS, as well as its peers in the TIC space, has always been a pure data generating corporation, either sitting in the space between the primary actors in trade, or acting as the verifying body in terms of both goods and pro-cesses etc. The evolution of the data presentation - initially in a hard copy (from paper, telex mes-sages to faxes followed then by digitalized carriers) – also drove very strongly the evolution of how we dealt with the data itself – from discreetly itemized pieces of it to the streams of digitalized data that could be seamlessly processed and analysed. Howe-ver, we should all remain aware of some basic gui-dance to apply to the data that we can now access. a) Not all data, particularly historic data, is of the same quality. Whilst a great amount of data is off excellent quality in so far as the user can discern, it may have been gathered using a flawed ethodo-logy, or may have been gathered within a limited field which special characteristics and it is hence skewed to some degree. b) Not all data was gene-rated or gathered on the same basis. For instance,

with laboratory data, methods used to analyse oils, as an example, have become more sophisticated and more accurate with the advances in technolo-gy. Using old data, which is valid in general terms, may require some filtering or else false conclusions may be drawn. c) Some data may be partial. Of-ten, even with new data, the organisation gathe-ring that data only has a specific end use in mind, and so limits their collection to the data points that their project requires. Whilst there is absolutely no-thing wrong with this, any subsequent use should be aware that the data set was never intended to be comprehensive. Applying this knowledge as guidance one can still make tremendous use of existing data within mo-dern analytics. Trade flows in oil, gas and petroche-micals, and the evolution of quality in the compo-sition of road fuels are two specific areas that SGS has been involved in for many years where our use of data analytics has provided a new dimension to existing data. With the growth of both interest by civil society and the consequent legislation, the composition of road fuels delivered at the point of sale has been an ongoing long term project for our staff for over thirty years now. Within that time, we have moved from simple spreadsheet analysis to databases and now we are beginning to apply the more sophisti-cated tools available on the database. In migrating the data, it has required that we do some data fil-tering, as, particularly with older data, laboratory methods were neither as precise as the ones now in use nor in some cases even available. As an exa-mple, the sulphur level in road diesel thirty years ago was of the order of 500 parts per million (ppm) and is now between 50 and 10 ppm. Put simply the methods in use at the start of the timeline could not have detected the levels now routinely mea-sured. In the same way, thirty years ago a prima-

ry measure in most gasoline was the lead content, as TEL was the common Octane booster around the world, today there are a mixture of non-me-tal containing species, largely oxygenates, used to boost octane in gasoline, so the matrix being exa-mined is significantly different. Hence a simple tracking of gasoline quality is possible, but significant legislative and specifi-cation changes need to be known and factored into the timeline to make sense of the data. It is this wider knowledge of the entire industry that makes the powerful new tools complete. One without the other can be interesting, even use-ful, but the context provided by real knowledge is the nexus from whence the true added value can be realised. Similarly, the gross measurement and tabulation of trade flows is becoming ever more available from several providers, both well-established large corporations and more recent innovators. Many of them provide economic analysis of these trade flows to the industry. However, again, if one understands the regulatory and even end use pic-ture the trade flows can be better understood. The integration of big data on trade with knowledge will play an increasing part in how trade is executed, that is without doubt. The need is that the data itself is both consistent and validated, and that the knowledge is expert if the maximum value is to be extracted. Even in this new world of digitised information, the methods may have changed, the speed of response shorte-ned, but the requirement for reliable and defen-dable basic data and the knowledge to set that data in its proper context, far from diminishing, has increased. The way we deliver our work is evolving rapidly, the tools we use to gather the data are also changing, but the fundamental is-sue of trust and precision remains unchanged.

IT IS THIS WIDER KNOWLEDGE OF THE ENTIRE INDUSTRY THAT MAKES THE POWERFUL NEW TOOLS COMPLETE.

New entrants harnessing innovation and newbusiness models to revolutionise power sector

ENERGY SYSTEMS CHANGING BEYOND RECOGNITIONThe share of low-carbon energy sources is increasing, initially driven by incentives offered by governments and now through lower technology costs, with electri-city sector decarbonisation taking place both at distri-bution grid and transmission network level.While the intermittency of renewable energy sources, and in particular wind and PV that are present at ever larger scales, is well documented, just as the general concept of virtual power plants (VPP) combining a multitude of small-scale generation facilities such as micro combined heat and power units, the rise of sca-lable energy storage technology is ushering in new business models to the power industry.Distributed or decentralised power generation are increasingly used to provide the power necessary to meet local or even regional loads and installed capa-cities continue to grow at double digits rates across much of the world. As a result, national transmission operators are finding it ever-more challenging to forecast how much power will flow into the network at any given point in time.This creates opportunities to create technical and commercial value. Barely 2 years ago when discus-sing in this magazine the value proposition of new and renewable energy sources for traders, the focus was on access to market, flexible pricing contracts and weather risk management. How times have changed! With their widespread adoption and increased sophis-

tication new business models are starting to emerge that are set to challenge the business models of market incumbents, and for of all large-scale thermal power plants providing ancillary grid services.In order to realise their potential and create value however, distributed generation assets will rely on big data management systems, cutting-edge forecas-ting tools that can draw on machine learning capabi-lities and VPP operations optimization software. The promise of artificial intelligence is that combined properly with decentralised energy systems, better deci-sions will be reached, unlocking real value for the ope-rators. And just as elsewhere in the commodity trading ecosystem this will increasingly be possible with little or no human intervention, thereby reducing costs.

MEET THE NEWCOMERSA major development these past years has been au-tomotive companies edging into what some utilities consider as their territory.Tesla is the prime example, but even established car makers such as Nissan are now working with energy storage companies. The benefit goes beyond the core business of selling cars as understanding consumer be-haviour patterns through access to household data…Whether by developing their own systems and technology or through partnering with specialised firms, these new entrants can leverage their tech-nical capability to unblock the value derived from power flexibility. Nowhere is this more visible than in Australia where Tesla has rolled out its battery technology to meet peak capacity demand in the regional grid of South Australia.The Tesla Hornsdale Power Reserve is already ma-king a tremendous impact, shaving millions of dol-lars on the cost of meeting peak demand. But the impact of large-scale battery systems lies also in its capacity to come ahead of the incumbent genera-tors in the capacity reserve despatch curve. Going

from 0 to 100 MW in 140 milliseconds to provide grid reliability and peak power means that Tesla can now rewrite the grid code, potentially challenging pre-existing capacity reserve technologies.The project is proving so successful that the South Australia labour government is planning to build a 250 MW virtual power plant based on household rooftop PV modules and battery storage. In California meanwhile, GE announced as recently as 7 March 2018 that it was launched its own grid-scale energy storage system called Reservoir.A sign that the pace of evolution is frantic, blockchain technology is increasingly viewed as offering the backbone infrastructure to make elec-tric mobility and decentralised renewable-power based systems a reality. But for all this to happen, companies will need to un-derstand the customer, improve their understanding of needs. And to do so it is marketing, more so than technology itself, that will prove key, whether in terms of proposition, brand or distribution channel.

NEW ENTRANTS CAN LEVERAGE THEIR TECHNICAL CAPABILITY TO UNBLOCK THE VALUE DERIVED FROM POWER FLEXIBILITY.

daniLo BertoCChi, Swiss Coaching Partners, "Performing a low carb Society".thomas esdaiLe-Bouquet, Chief Operating Coordinator, STSA


2018, the year AgTech reshapes production, monitoring and exchange of commodities

In 2017 the AgTech sector showed robust growth with capital continuing to flow into the sector at ever increasing rates giving rise to more companies targeting more points in the value chain. A record total of ~$1.5b was deployed helping sus-

tain and increase the momentum of the last five years. A key shift in the market has been a rapid increase in participation by new entrants with large checks and targeting growth investment. As a result, 2018 will see the consummation of the first batch of AgTech unicorns. Over $860M, across 35 deals, were invested in companies in the microbials segment making it the single largest investment area for agtech last year across 35 deals. Bayer’s joint venture with Gingko Bioworks committed $100M to repro-gramming the genome of microbes. Gingko joined Indigo as the latest agtech unicorn having raised over $400M to date. Competitors include Zymergen which raised $160M in a round with Softbank, in a superheated segment. Notwithstanding the companies making input products for traditional Agriculture, two emer-ging segments that are heating up are supply chain and marketplace companies. In 2017 Plenty, a Finistere portfolio company, raised a $200M in-vestment round led by SoftBank to re-engineer

the fresh fruit and produce value chain. Farmers Business Network also closed a $203M round to sell inputs online to farmers, making a play at dis-rupting the current physical channels to market for Agriculture inputs. Beyond the enthusiasm for investment returns in a marketplace that contributes ~$3 Trillion of global GDP the understanding of the value chain by venture investors has increased and tra-ditional Silicon Valley entrepreneurs are finding more tractable markets for innovative company building. In particular company building muscle is being flexed to disrupt risk across the commo-dity value chain such as reducing transactional cost and complexity. Fintech will be a new area of rapid development in our view, with inter-nal research at Finistere demonstrating that the segment is grossly under-invested relative to mainstream Fintech. The latter captured $60B in VC money over the last decade while Fintech directed at commodities is closer to two orders of magnitude less. Companies such as Full Har-vest are reinventing how the farmer is more di-rectly linked to the food processor, cutting out time and hands that touch produce logistics while creating new value for visually blemished but edible food. Similarly startups like Trade-lanes, with Silicon Valley DNA, are attempting to digitise the global movement of commodity goods by overcoming regulatory slippage. Com-pliance and quality issues are being addressed by innovation on connected devices, tracking and software technologies such as public and private blockchains. Telesense, a Sunnyvale, California-based company, is attempting to create a Grain FICO score for quality/risk of profit for large grain traders using IoT sensing and predictive software insights across grain

elevator assets on a global basis. Finally insu-rance companies such as Crop Pro Insurance, company, are disrupting the private insurance markets on-farm and through the supply chain by enabling farmers to underwrite yield and profit outcomes from the use of bundled tech-nologies, such as seed, crop protection or digital agronomy. The resulting large data sets create in turn novel actuarial tables to underwrite dis-crete on-farm or supply chain risks. Together, all of these solutions are reducing the friction points implicit in traditional supply chains where poor information flows naturally create inefficiency. The next five years will see tech-nology playing an increasingly transformative role in global commodity supply chains driving more dynamic pricing and decreasing informa-tion asymmetries between participants. This is a revolution for the supply chain but it also puts current incumbents at risk of being left behind. As the landscape changes so does the like-lihood for consolidation of the market, similar to the mega-mergers over 2015-2017 across chemi-cals and seed (Dow-Dupont, reborn as Corteva; Syngenta-Chem China; Monsanto-Bayer). As ADM approaches the purchase of BUNGE there is clearly a reach for growth within the commo-dity sector by the largest groups. This is a strong signal that not just change is here but that in-trinsic growth is harder to find and it presents a large opportunity to others given the growing maturation of VC-backed technology companies that could offer an edge for both smaller co-ops, farmers and the major commodity traders. The fintech segment will also become very important as financial services from lending to insurance get re-shaped by new entrants and incumbents seeking fresh opportunities.

NEW SOLUTIONS ARE REDUCING THE FRICTION POINTS IMPLICIT IN TRADITIONAL SUPPLY CHAINS WHERE POOR INFORMATION FLOWS NATURALLY CREATE INEFFICIENCY.

The endgame for commodity traders begins

The commodity trading industry, with a less profitable future ahead of it, has embarked on its endga-me. Following a 4.5 percent drop to $42 billion in the industry’s gross margins in 2016, the biggest

trading companies began a quest for the kind of size and competitive edge that would let them do-minate the largest, most profitable trades. From oil to agriculture, a torrent of acquisitions and investments in cutting-edge technology was set off that started to transform the industry. The gap between players with critical mass in one or more commodities and the rest of the pack was wide-ning. It became clear that within a few years, the commodity trading industry would be overwhel-mingly dominated by its biggest players. Why spend resources getting bigger? Size, it turns out, provides an edge when it comes to gross-mar-gin volatility: Traders with more than $500 million in gross margins per commodity class experience 30 percent less gross-margin volatility on average than smaller traders, according to our research. This greater resilience permits the industry’s lar-gest players to take greater risks, and in turn, strike bigger, more profitable, multi-year deals. During 2017, the same few names—Glencore, Trafigura, Vitol, BP, and Shell—were repeatedly the ones

carrying out the industry’s largest transactions. Simultaneously, they were the ones increasing their market share and raising the bar on what it takes to compete. Today, prerequisites for staying in the game include the capability to leverage pro-prietary information on commodity flows across geographies; access to attractive financing and su-perior shipping and logistics; and finally the ability to source and substitute commodities globally and accommodate fragmented wholesale customers. The largest trading operations have been able to make the investment necessary to build out their global reach, while still streamlining processes and cutting costs. Today, these global titans can nimbly manage deals across the globe from point of sour-cing to account settlement. At the same time, they have cut operational costs by as much as one-third, without affecting performance. More cost-savings and speed lie ahead as traders invest in robot-to-robot trading and further digiti-sation of middle and back offices. Between 2012 and 2016, fully automated futures transactions grew by 50 percent in energy, as much as 100 percent in precious metals, and up to 200 percent in some agricultural products, according to a US Commodity Futures Trading Commission white paper. Some players are even bringing in tools as sophisticated as blockchain technology. Given the industry’s upheaval, it’s not surprising digital e-commerce giants like Alibaba and Ama-zon are buying their way into the industry with offers of cheap and easily accessible cross-bor-der finance and credit-risk reporting capabilities. These new industry faces can be a threat to smal-ler players or may represent their salvation as potential strategic partners in efforts to increase digital capabilities.Meanwhile, top commodity traders are going a step beyond digitisation and drawing on new

types of analytics and artificial intelligence, which allow them to capitalise on the vast proprietary data in their portfolios and supply chains. Indeed, some leaders are pioneering business practices and setting new trading standards nonexistent as recently as a year ago. For example, top players are now building proprietary platforms with ma-chine-learning algorithms to analyse data from radar, thermal, and optical scientific imagery supplied by lower orbit satellites. By analysing patterns through algorithms, innovators can an-ticipate demand and supply and their impact on pricing, fulfilling trades more efficiently in real time with less risk.In the end, traders with larger financial reserves are more able to invest in the kind of advanced technologies that, in turn, help the company conti-nue to cut costs and take even more market share. Without the same resources, traders not in the top tier will have to figure out how to compete through partnerships or reducing costs and pro-cess complexity. Ultimately, as the endgame plays out, only the biggest and most digitally advanced players will thrive.

TRADERS NOT IN THETOP TIER WILL HAVE TO FIGURE OUT HOW TO COMPETE THROUGH PARTNERSHIPS OR REDUCING COSTS AND PROCESS COMPLEXITY.

aLexander franke, Partner in Oliver Wyman’s Energy Practice roLand reChtsteiner, Partner in Oliver Wyman’s Energy PracticeGraham sharp, Co-founder of Trafigura and a Senior Advisor to Oliver Wyman

arama kukutai & spenCer mauGhan, Partners, Finistere Ventures


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Cara waterfaLL

ECOM Communication, ECOM Agroindustrial Corp.

Big data unlocking farmer’s potential

The future of farming is in big data, but how do you harness its power in a way that makes it actionable? SMS Integrity (SMSi) by ECOM is a per-fect example of how to give farmers back their agency by developing an

electronic platform that enables the Sustainable Ma-nagement Services (SMS) team to answer the many questions growers have, from the optimal timing for harvesting to plant stressors and soil conditions. SMS teams, located in 23 countries in Asia, Cen-tral and South America, and East and West Africa, embody how a trading company can act as a local processor. By participating locally and buying from producers at the origin, companies like ours unders-tand the importance of investing in the long-term success of its farmers and their networks.Sustainability is more and more at the core of tra-ding companies’ business strategy as evidenced by the continued growth of SMS since 2004. As a pro-ducts and services provider for rural populations, it helps farmers at the grass roots level by creating the best, integrated supply chains. Today, SMS has over 1100 staff, who empower farmers by providing high-value services that aid them in their transition from subsistence farming to business farming. SMSi was developed to combat the ever-expanding data needs of a trading company and its farmers, of whom the vast majority live in rural areas with

little or no connectivity. Big data is essential in hel-ping understand the effectiveness of products and service offerings. By identifying inefficiencies, it can invest in the operations that yield the best re-turns, thereby optimising the benefits for all parties involved. Most importantly, it provides the support, infrastructure and environment required to sustain farmers and their livelihoods. SMSi collects actionable data so its agronomists and field technicians can access real-time infor-mation to enhance overall farm productivity. The platform is capable of analysing inputs and out-puts, providing farm practice recommendations and analysing a farmer’s income. SMS delivers customised products and services — including va-rious types of training and financial products— to its 700,000 registered farmers.A highly experienced field team is equipped to deal with the most rural circumstances. A typical week for the SMS team involves mapping and surveying approximately 3000 farmers. The team provides coaching assistance, training and assessment and enters the information directly into their tablets, thereby decreasing the number of errors. And roa-ming audit teams conduct blind checks that are reviewed by the head office to verify that the sur-veyors have submitted correct data. SMSi currently contains information on 320,000 coffee and cocoa farmers from 16 of the 23 coun-tries in which it operates. It will eventually house data for all of ECOM’s commodities, including edible nuts, spices and cotton. SMSi has given our company remarkable deci-sion-making capabilities to optimise the produc-tivity of farmers. Everyone — from clients to partners and investors — can learn more about the

quality, traceability and sustainability of the supply chain. We continue to develop partnerships that will provide macro-level data to complement the micro-level data of SMSi, allowing SMS to adjust its advisory business accordingly. Drone technology is another source of data that might help explore the impact of climate change on its farmers. “We are only now beginning to unleash the power of big data to increase the prosperity of our farmers, clients and investors” said Emmanuel Toureille, Chief Sustainability Officer, ECOM. “We are leveraging blockchain technology by pul-ling information from various systems to provi-de one common ledger. By deconstructing links within the supply chain, we are able to provide transparent and incorruptible data on the origins and journey of our products.” Above all, SMSi is a collaborative system that is leading its farmers and stakeholders to greener pastures. By extracting and analysing big data from the most information-poor regions, it is pos-sible to leverage data to increase farmers’ well-being and livelihoods, while reducing environ-mental impact and costs.

EVERYONE FROM CLIENTS TO PARTNERS ANDINVESTORS CAN LEARN MORE ABOUT THE QUALITY, TRACEABILITY AND SUSTAINABILITY OF THE SUPPLY CHAIN.


these communities. Our approach to stakeholder engagement is not event-driven, but rather a continuous dia-logue that enables us to identify and address potential issues proactively and collaboratively.

Do you believe new technologies like AI, blockchain, IoT, among others can help improve CSR issues? New technologies surely can support our work to ensure that rights are res-pected and that workers throughout the supply chain have a voice. We are currently looking into the question, how we can harness the potential of technology in this regard. However, we also have to limit expectations. New technologies alone won`t be the panacea to solve human rights risks in the supply chain. What is needed is a robust system to identify and address the actual and potential impacts, and technology can be one of the resources that we use.

Commodity trading can be viewed in subs-tance as the outsourcing of the procure-ment activity of a FMCG company. Do you see any synergies or differences? For FMCG companies to achieve their goals with regards to sustainable raw material sourcing, we must work with our commodity traders so that they, too, take an active stance on these issues. Collaborative action is key to achieve the necessary scale and momentum to address some of the systemic issues. Together we can have a greater and more sustainable impact than by wor-king alone.

How do you see new regulation (ex. CSR reporting obligations, phytosanitary stan-dards, UN Guiding Principles, among others) impacting the development of more efficient supply chains; to what extent do you see these as changing the relationship between FMCG companies and commodity traders?The Coca-Cola Company has publicly

supported the UN Guiding Principles from their inception and has worked to implement them. The UNGP apply to all companies – com-modity traders, FMCG companies and suppliers alike. They are the common denominator with which companies should align their poli-cies and business practice. One of our priorities is to cascade the UNGP further down in the supply chain. We aim for suppliers to embrace the UNGP, engage in their own due diligence, be transparent about their salient human rights risks, and take action to address them. This is a long journey, and one we will continue on for years to come.

Is regulation a key driver for companies to improve their CSR programs, or are consumer demand/expectations a more important one?All companies need to maintain their social license to operate, and that is a key driver for us. We recognize that in order for our business to be sus-tainable, we need to work to help ensure the sustainability of the com-munities where we operate. That work requires collaboration between businesses, governments and other interested stakeholders. At times, le-gislation may be part of the equation, but it is not the sole solution.

What are some strategies Coca-Cola uses to raise awareness among its consumer and business partners when it comes to promoting more sustainable practices?We believe that consistent and open communication with a diverse range of stakeholders, including consumers and our business partners, leads to continuous improvement as we work to respect human rights across the Coca-Cola system and strive towards our 2020 agricultural sustainability goal.

Interview Nina Eggert

In the upcoming years do you see CSR as a powerful driver reshaping the business models of companies involved in internatio-nal trade?The Coca-Cola Company has com-mitted to more sustainably sourcing of our priority agricultural ingredients by 2020. Our Sustainable Agriculture Guiding Principles (SAGP) help de-fine what “more sustainable sourcing” means to us and outline our expecta-tions for the agricultural suppliers in the areas of human and workplace rights, environmental stewardship and responsible farm management. Many other companies are on the same jour-ney to drive transparency, accountabi-lity and sustainability throughout their value chain. This trend to sustainable sourcing will not go away; in fact, it will increase in the future.

Modern supply chains can contain thou-sands of diverse & dynamic suppliers, making it extremely hard for a company to conduct effective due diligence across their entirety. How do fast-moving consumer goods (FMCG) companies approach this? We expect our suppliers and bottling partners to embrace responsible workplace practices and uphold principles of our Hu-man Rights Policy. We communicate these expectations through our Supplier Gui-ding Principles (SGP). The SGP, which are aligned with our Human Rights Poli-cy, are part of all contractual agreements between The Coca-Cola Company and our direct suppliers. We closely monitor the implementation of the SGP. Our agricultural supply chain is very complex, and every commodity is diffe-rent. Just to give you an idea of the com-plexity, we rely on over 5 million farmers to deliver our agricultural supply. We have convened numerous local workshops in regions around the world to help educate stakeholders across our agricultural supply chain to drive implementation against our 2020 sustainable agriculture goal. In order to better understand the risks within our agricultural supply chain, we have conducted third-party due diligence studies focused on child and forced labor, and land rights. Our studies have focused on sugar because it is one of the biggest commodities we source, and we have made these studies publicly available on our website.

In which supply chain elements do you see CSR issues for FMCG companies such as yours? How can companies like Coca-Cola address these issues? Can you provide a concrete example? Through a global exercise, and with the participation of external stakeholders, we have identified our salient human rights risks. These are 13 risks that have the most severe actual and potential human rights impacts associated with our activities and business relationships. These risks include, for instance, child and forced labor, land rights, access to water and environmental impacts. Our Human Rights Report provides details on our efforts to address these risks. But let me give you one example: Recruitment fees, which many migrant workers have to pay, are a key indicator for forced labor. Recognizing this, we adopted and rolled-out a “no fees’ position”. Since then, we have had success in combatting recruitment fees in many markets. In Qatar, for example, where passport retention is routine and paying fees is frequent, Coca-Cola employees maintain their passports, they do not pay recruitment fees, salaries are paid di-rectly to their bank accounts, (which avoids deductions from intermediaries), and exit visas are signed at the time of engagement.

How can FMCG companies ensure that communities where they source raw materials from feel the benefit of their presence? Engagement with the people and communities where we operate is key in this regard. Our social license to operate is grounded in our ability to understand and mitigate social and environmental risks for

Brent wiLton | the CoCa-CoLa CompanyHow corporate social responsibility is driving new business models in international trade

interview

BRENT WILTON GLOBAL HEAD OF WORKPLACE RIGHTS THE COCA-COLA COMPANY

1985: Graduates as a Labour lawyer in New Zeland2000: Geneva-based, working for the International Organization of Employers (IOE) IOE Secretary General Board member of the UN Global Compact Co-chair of the UN Global Compact multi-stakeholder Labour and Human Rights Working Group2015: Present: Director of Global Workplace Rights at Coca-Cola

For many years STSA has been actively engaging with

authorities, civil society, academia, and member companies in order to address transparency, sustainability and human rights challenges. Approaches for these issues need to be fit for purpose and meet the level playing field expectations.On payment transparency STSA has been monitoring proposed changes to the Swiss corporate law. This revision, to align with international standards and in particular European regulation, would require disclosures of payments to governments by Swiss-based firms for extractive activities. STSA supports such a provision and the Swiss Federal Council’s position, but extending this to commercial trading activities would require a more complex approach given the activity’s very different nature.As of today, no international regulation exists, what constitutes a government’s “first sale” is hard to define and normal confidentiality clauses applicable to any commercial contract apply. That’s why STSA and its members are active in the Extractive Industries Transparency Initiative Working Group on commodity trading transparency that works on how state owned enterprises in producing countries could disclose oil first sales. A solution is only possible through a concerted initiative between industry and producer States at international level.On human rights, STSA supports the UN Guiding Principles for Business and Human Rights. STSA has worked closely with Swiss authorities, NGO's and the IHRB on the elaboration of a sector-specific guidance document. Expected to be published this year, it should help companies in implementing those principles by providing some best practices.

STSA ACTIVE IN TRANSPARENCY DEBATE

speCiaL edition | March 2018 | Commodities ||| COMMOTECH

Christophe CantaLa, Head of Specialised Trade Clients, Marketing and Risks, BNP Paribas phiLippe penet, Head of Specialised Trade Solutions EMEA, BNP Paribas

Commodity trade finance in the digital age Reinventing trade finance customers’ journeys

VISIONInnovation and Digitalisation are significant pillars of development for Trade Finance banks. For instance at BNP Paribas group, the 2020 vision is supported by 4 identified enablers: Conduct, Digital, Sustainability and People change. To accelerate the digital transfor-mation and serve the evolving needs of clients, an am-bitious plan, supported by a €3bn investment, is being implemented. Similar plans are being developed by most trade finance industry players.

COMMODITY TRADE FINANCE: FROM TRADITION TO MODERNITYCommodity trade finance today is a traditional business where paper is everywhere. Bills of lading are physi-cally circulated among many participants. Interactions are mostly through phone, fax and numerous emails and, given the large number of parties involved, rapidly time consuming. Information is shared sequentially by all parties, leading to very long processes. Data captures are redundant and reconciliations mostly performed ma-nually, thus increasing operational risks. Tasks are often repetitive and labour-intensive thus making it difficult to promote employees engagement in their daily work.Nowadays, people are expecting more transparency,

more efficiency, more security, reduced costs and a quic-ker turnaround. Digital transformation can help addres-sing these challenges and better serve commodity players.

BEYOND BUZZWORDSProcess digitalisation is already happening in the banks with a paperless objective shared by most actors. Several projects have emerged and are now being deployed. Sup-ported by internal or external incubators, solutions can be implemented in only a few months thanks to innovative ways of working such as agile methodologies, design thinking and clients co-design. Those can apply to inter-nal processes but the value still remains for customers benefitting from quicker processing times.With Blockchain, trade finance banks are investing mas-sively. Blockchain technologies have the potential to be disruptive all players. Quicker processing of transactions, increased security and transparency and paper/emails re-duction are some of the identified gains from this innova-tion. 2016 has seen several proofs of concept being deli-vered: Trial payments executed successfully, consortiums put in place. In 2017, we’ve observed some further de-velopments on these initiatives. For example, R3 has de-veloped its own Corda platform and IBM has delivered Hyperledger Fabric framework. However, the standards have not fully emerged and legal uncertainties remain. Will 2018 provide some answers? On top of these long standing projects, practical solutions are being deployed, aiming to address specific pain points. MyCollat, a solu-tion enabling real-time monitoring of goods used as colla-terals by banks, is one example of such available products. It has been developed in codesign with several clients, a bank and a warehouse network.Using Big Data, banks also have the possibility to bet-ter understand their clients’ ecosystem and develop further their expertise in the value chain. The concept

is, notably, to evaluate links between clients and sup-pliers. The challenge of data confidentiality, however, needs to be addressed carefully in order to preserve the confidentiality of client information and complies with the most stringent regulations.Another angle of innovation explored is with Artificial Intelligence (AI) and Robotics. Dedicated AI labs are being established by banks to foster innovation and pro-vide pools of expertise available to their own network. For trade finance operations processing, we can already see some solutions being deployed to automate and ac-celerate compliance checks and bank controls. By auto-mating some parts of the processes, the operating costs and processing times can be further reduced. Artificial Intelligence is a lever that is massively developed and other dedicated solutions for commodity players are being identified. Taking into consideration the usages already in place in the retail business, it has brought a lot of comfort and relevancy to clients. For instance, chat-bots may bring answers to simple and recurring client’s questions, 24/7. The stake is to feed the AI engines with relevant and valuable data for better results and trade finance banks are well positioned to achieve this.

TRANSFORMING CUSTOMER JOURNEYThese initiatives illustrate trade finance banks’ am-bitions to provide distinctive experiences for clients thanks to digital technologies. The banks are com-mitted to transform customers’ journey and meet their precise needs, with a clear focus on the global experience. In the digital age, the question is not “What to offer” to clients but “How to offer it”. Of-fering a similar level of satisfaction that clients are already receiving in their private life from the likes of Google, Amazon, Facebook and Apple is a must. The journey continues!

THE QUESTION IS NOT “WHAT TO OFFER” TO CLIENTS BUT “HOW TO OFFER IT”.

Swiss Trading & Shipping Association

The world of Commodity Trading is constantly hungry for new talent

STSA OPERATOR’S CERTIFICATE 104 hours

Designed for Aspiring or Junior Operators and Charters, interested in understanding the life cycle of a trade from the operational side

SPECIALIST IN DOCUMENTARY CREDITS 20 hours

Designed for Junior Credit Officers interested in mastering documentary credit techniques that underline the financing of the physical commodity flow

COMMODITY TRADING FUNDAMENTALS 16 hours

Designed for employees new to the industry or in an administrative position interested in a comprehensive understanding of the business

STSA COMMODITY TRADING RISK ANALYST CERTIFICATE48 hours

Designed for Aspiring or Junior Risk Analysts, Trader Assistants, Middle Officers, Auditors, and IT Business Analysts interested in risk management

For more information: www.stsa.swissTHE RIGHT JOB FOR YOU

STSA_Pub_Commodities_281x198.indd 1 09/03/2018 10:46


aListair Cross

Chief Operating Officer Mercuria Energy Trading

Potential benefits for the use of blockchain in commodities trading

The physical commodities markets lag behind the rest of the financial markets in terms of their techno-logical progress in the digital age. Paper based documents are still physically exchanged between

parties, creating a needlessly cumbersome and manual system that wastes time and money for everyone involved while also compromising se-curity and introducing risks. In our increasingly digitalized world, something must be done to bring these markets into the 21st century.However, in practice change is hard, markets are global and participants vary in technical sophis-tication. Procedural changes in these markets take time, money, co-ordination and effort and then of course there is the general distrust about anyone else operating in the same markets that you are. It is for these reasons that things to date have never really progressed. For the first time there is a technology that looks set to solve all of these inefficiencies and risks and it is getting our industry excited. The blockchain buzz is gaining momentum within our sector as there is a real drive to improve processes, se-curity and make things more efficient. In the

current market environment, where commodity prices are low and margins thin, there is a huge focus on corporate costs and getting expenses down. Additionally, a number of high profile frauds and an increase in attempted fraudulent activity has market participants, financiers and insurance companies focused on security. There are many external and internal factors which are driving change in the commodity markets and their participants and technology has the poten-tial to satisfy many of them.Blockchain technology is secure, allows com-panies to retain complete control and most importantly creates a record which cannot be reversed. Automating, securing and standar-dising processes will reduce and streamline financing requirements. Due to the enhanced controls and workflows that this technology promises the potential to converge the concepts of “control” and “title” more closely together is real, with the perfection of title being the Holy Grail, potentially opening the doors to non-tra-ditional commodity financiers and financing models, all of which could potential save big money in high turnover businesses. At Mercuria, we are not underestimating the ef-fort involved in effecting this change, however, we do believe that it is possible and that the po-tential benefits make it worth the effort on eve-ryone’s part. Technological advancement in this space could be monumental and if pushed far enough, new technologies will be revolutionary and disruptive.

Blockchain is a buzz word that gets everybody excited, take the example of the drinks company that added ‘blockchain’ into its company name and the share price immediately spiked 500%, and is encouraging this archaic industry to push its boundaries and consider change. In reality there are many different technologies which are advancing which have the potential to trans-form our industry, change the ways we manage our businesses, the way that we confirm tran-sactions, how efficiently and accurately we mo-nitor and track our products and supply chains, and how we communicate with and between all market participants.We are keen to be at the forefront of any change and we believe that technology can allow for optimisation of business, better tra-ceability of product, increased security of in-ventory, changes to current funding models and overall improvement of the efficiency of all of our activities.There are many hurdles to overcome and egos will need to be sidelined so that the market can work together to standardise terms and processes but if we can achieve this the po-tential of these new technologies is stagge-ring. Not modernizing commodity trading is not an option, it is likely that within the next few years machines will be mining, produ-cing, loading, transforming and transporting commodities without human intervention, the days of physically stamping a bill of la-ding have to soon be over.

IF PUSHED FARENOUGH, NEW TECHNOLOGIES WILL BE REVOLUTIONARYAND DISRUPTIVE.

Machine vs. Mind: reconciling innovation with the human factor in trading

Over the past 25 years, two events came to symbolise the modern struggle of man versus technolo-gical innovation.The first one, was the 1996 chess tournament between interna-

tional chess champion Garry Kasparov and IBM super-computer Deep Blue, which was equipped with data from hundreds of existing master ga-mes, and able to evaluate 100 million potential po-sitions per second. After winning the first match, Kasparov went on to lose the tournament.Twenty years later, a computer program called Alpha Go Zero beat Lee Sedol, the world cham-pion at the ancient game of Go. This time the program had no previous human input, mea-ning the program taught itself how to play the complicated game. The first computers to be ever introduced were remarkably competent in recreating tedious and repetitive tasks, and it wasn’t long before they were embraced by the modern workplace. As tra-ders, they made our jobs infinitely easier – and we, as a result, became more efficient. The second wave of technological advancements, however, started a new conversation. If compu-ters no longer needed instructions, only examples to be followed, how soon would they be able to replace highly qualified humans in the workplace? Recent studies indicate that millions of jobs may

be under threat in the near future, as a result of ongoing labor market disruptions, one of them being automation. While it is undeniable that we are faced with a period of change, we are not mo-ving towards a world with no jobs at all – in fact, the commodity trading sector might be facing an immense opportunity.The daily activities of a commodity trader, mainly those involving data processing and analysis, and administrative tasks, will be op-timised, even overtaken, by technology over time. A trader's true value, however, is not in how fast these tasks are completed – but in the interpretation of data. With more data pro-cessed more efficiently, and enhanced analysis available, a trader’s decision-making process will be faster and better informed. Technologies such as Robotic Process Automa-tion and Predictive Modelling (enabled by ma-chine learning) have the potential to improve the quality and efficiency of traditional domains – for example yield forecasting or balance sheet ana-lysis by combining gigabytes of data (structured, unstructured, corporate or public). Additionally, innovations such as blockchain will see the role of merchants evolve, creating efficiency gains, en-hanced data security and speed. But technology alone cannot replace most of the aspects in which we, as commodity traders, add value.At Louis Dreyfus Company (LDC), we believe this a new beginning, where the new generation of traders will have to balance technological inno-vation with human skills such as emotional intel-ligence. As trading evolves, it will require nurtu-ring sustainable and durable commercial ties with clients, suppliers, logistics providers and other participants across the commodities ecosystem.A commodity trader underlying assets are the physical products that need to be taken from ori-gin to destination. This process can be digitalized, but the know-how, the relationships with farmers

and customers, are aspects of our business that will always have a human face. We may embrace innovation, but our core values will remain un-changed. Internally, more experienced traders are entrusted with coaching their teams, to motivate and to lead them through challenging times. No machine to date has successfully led a team in the right direction.For companies, the critical factor now is to find that balance between human mind and machine, not at the job level, but at task level. There are activities that will become fully automated, as computers have already demonstrated they can do them more efficiently. For others, either there will be a combination of human and machine, or they will remain the domain of humans. In a way, we can envisage a sort of “super-trader” in the future.Companies that succeed in finding the right ba-lance will out-perform their peers. On the other hand, managers who are able leverage this op-portunity to redefine their jobs and their team members’, allowing everyone to focus on their core competencies, will see their roles enhanced by the latest innovations. If the world Go cham-pion had had Deep Blue’s support back in 2016, he would have beaten Alpha Go Zero without a doubt, and would have gone down in history as the first bionic Go master.

TECHNOLOGYALONE CANNOT REPLACE MOST OF THE ASPECTS IN WHICH WE, AS COMMODITY TRADERS, ADD VALUE.

Guy-Laurent arpino, Chief Information Officer roBert serpoLLet, Global Head of Trade Operations pauLa freire, Global IT Head of Trading, Operations and Customer Services, Louis Dreyfus Company


pauL dex Derivatives Business Development Manager, Fidessa mike wiLkins Derivatives Business Development Manager, Fidessa

prof. stéphane marChand-maiLLet Department of Computer Science (Machine Learning), Faculty of Science, University of Geneva

Arresting entropy in commodities trading:towards a single platform model

The days of dealing with a clutch of standard contracts traded across a handful of exchanges with de-fined trading hours are gone. Commodities firms are now 24/7 global operations, firing orders

around for a myriad permutation of contracts. Change driven by market trends, regulations and local idiosyncrasies has seen commodities firms establish desks around the world, trading in different currencies, using different trading platforms often made up of a mishmash of sof-tware cobbled together. The technology estate is fragmented and consequently, so is the firm’s view of risk and its own trading activity. That comes at a cost. Until now, it’s a cost firms have largely resigned themselves to bearing, either be-cause there wasn’t an alternative, or the benefits of change weren’t deemed worth the difficulty. That view is fading.

THE COST OF DISORDERConsider the scenario. In Chicago, a trader en-ters a position on the CME for wheat, traded in dollars and measured in bushels. His Pari-sian colleague does the same, but his contract is traded in Euros and measured in metric tonnes. Each trader hedges their position. The wheat is grown in different places and will have slight-

ly different characteristics, but both are affected by the same fundamental market conditions. The two positions affect each other, and without a consolidated view, the head of trading can’t confidently understand overall exposure. At the same time, two traders have made hedge trades, incurring broker commissions and exchange fees, when a single combined hedge trade would have sufficed.This is a pattern repeated globally hour by hour, day after day. Wheat is just one example, but Brent versus WTI is another. It may sound simple to consolidate positions, but when relying on a sprawl of trading platforms and spread-sheets around the world, it’s anything but. When traded contracts differ for similar underlying commodities, firms must also find a common approach to pricing risk and planning hedges. However, most firms could match a considerable percentage of their flow internally.Those trading in products or via entities affec-ted by MiFID II will also find that this approach helps them to adhere to the strict position limits now in force. By internalising flows, the orga-nisation is less likely to breach limits, or have to make fewer sacrifices to keep within them.

GROWING COMPLEXITYThere are three compelling reasons to think again. First, the general regulatory push for a firmer understanding of compliance, risk and money management across trading firms. Dodd-Frank in the US and MiFID II in Europe push financial markets and participants to greater transparency and self-understanding. Second, the mounting business case across various com-modity markets as the trading landscape changes. Third, innovative technology now exists to make a consolidated approach possible.Consider the oil market. In the heady days of

$120 oil, incentive for consolidation was li-mited. Expansion was the name of the game and profits were plenty high enough to cover inefficiencies. Then the crash – when many or-ganisations would have been rueing bloated IT ecosystems but had little cash to invest in rec-tifying the situation. Now though, with prices rebounding to a respectable but not excessive level, there is both the potential and business case for investment. Or take LNG: US exports have made it the commodity du jour and natural gas has beco-me a more liquid, volatile market. High fees and market rates make the trading opportunity high, but the cost of a suboptimal, unconsoli-dated trading strategy high too.In other commodity markets the opposite pro-blem arises. Look at ags, where prices are de-pressed. With no firm indication of how long the slump will last, heads of trading and chief operating officers will be seeking ways to avoid unnecessary cost and risk, yet be struggling for the capital to invest.

THE ART OF THE POSSIBLEThe goal then, is a single, state-of-the-art conso-lidated platform. One that brings together global execution management, order manage-ment and hedge management, providing an additional layer of risk management in the process. Once this may have been unrealistic, but Fidessa’s innovative commodities trading platform, drawing on experience across mul-tiple asset classes, has been helping firms keep a handle on their exchange-traded commodity activity for some time. In doing so, firms gain a greater understanding of their risk, can re-duce the cost and volume of hedge trading and halt the creeping disorder all too common for global trading IT estates.

FIRMS CAN GAIN GREATER UNDERSTANDING OF RISK AND REDUCE THE COST OF HEDGE TRADING.

On the many promises of AI

Saying that Artificial Intelligence (AI) has the potential to impact all aspects of our society has become a common place. However, one could equally argue that AI has been among us since computerised systems started suppor-

ting our daily activities. From smartly organising data into databases to predicting the weather or helping our driving, AI already hides under mul-tiple forms and at levels we are so familiar with that we would not imagine how to do otherwise. So what is so new about the current times?There are two inter-related evolutions that make AI enter a new era. First, the global communica-tion context within which current AI works on enables its operation to be at a global scale based on the capture of globalised data. For example, from communities of clients and their actions, recommendation systems can profile users, make accurate suggestions, predict purchases and opti-mally manage stocks. Second, the power of the in-frastructures (computing and storage) over which AI runs has dramatically increased. More powerful

machines are crunching more data, more rapidly. Whereas 30 years ago one of the main challen-ges of AI was to capture human knowledge for inference, this operation is now crowdsourced via the recording and mining of the traces of our daily activities (so-called Big Data, boosted by the Internet of Things) feeding Machine Learning algorithms, possibly driving various types of ef-fectors. The consequence that we currently see emerging is that AI is not anymore confined wit-hin specialised domains where carefully encoded domain-knowledge is required. By virtue of lear-ning from massive amount of data, AI can easily propagate to all places where some intelligence is required and is even foreseen to surpass human ability in many domains (as loudly exemplified by the performance of AlphaGo). Today, AI may function as a black-box that just requires to be fed with “relevant” data, in the hope that it contains the “right” information that will be juiced into “knowledge” over which AI-inference will be performed. Giant IT players now propose ever easier-to-use off-the-shelf solutions with the promise of AI benefits. These benefits are essen-tially prediction and optimisation. By crunching data at a scale and pace out of human reach, AI can capture a global picture of its environment and its dynamics, perform informed predictions and get involved in complex decision-making. Compared to humans, AI is able to exploit better and deeper the volume, diversity and structure of the data describing its environment. It has there-fore the potential to perceive and model processes more thoroughly, to investigate a larger number of solutions and finally to propose some process optimisation that may surpass human creativity (as much as AlphaGo Zero is said to have explored strategies never deployed before).

Such a promise, associated with a seemingly low price to pay for feeding the AI black-box has started a race where every company is looking at integrating AI so as not being made prehistoric. However, AI models such as the popularised Deep Neural Networks are still far from being mature enough to be released in the wild. Their simplicity of use is still hiding a lot of magic for fine parame-ter-tuning and such models are yet to be proven robust to the world as it appears. Benefiting from AI may not be as simple as using AI, and AI expert advice will still be needed for the times to come, before AI blends naturally and profitably into hu-man operations.As a highly collaborative activity, trading seems like an adequate playground for AI. By capturing, analysing and mining communication data that is exchanged at all trading stages, AI may grasp the global operational landscape and provide new in-sights for policy, regulation and tax system design. Conversely, trading actors may benefit from AI by letting it digest the large volume of complex regu-lations and constraints to optimise processes, pro-tocols and procedures. Not only may AI optimise for financial costs but it may also be the perfect partner to embark environment-protective criteria for making efficient all aspects of exchanges such as the transport or storage of goods. Autonomous AI-based driving systems may collaborate with AI-optimized logistic managers and increasingly relieve humans from basic, tedious or complex parts of the process, while diminishing the costs over environment-optimized operations.If there is one puzzle that even AI itself cannot clearly resolve, it is how AI will transform our daily lives and activities. Mostly because like every piece of technology, AI will be as good or bad as we decide it to be.

GIANT IT PLAYERS NOW PROPOSE EVER EASIER-TO-USE OFF-THE-SHELF SOLUTIONS WITH THE PROMISE OF AI BENEFITS. THESE BENEFITS ARE ESSENTIALLY PREDICTION AND OPTIMISATION.

The promises of modern Artificial Intelligence create a race but its true benefits may not be as simple to access as it seems.


Certificate of Advanced Studies

CAS Commodity Professional The CAS programme provides its attendees with a thorough understanding of the commodity industry and its characteristics. The CAS in Commodity Professional combines theoretical knowledge with practical learning experience in a powerful mix. This programme prepares the participants to take on management or specialist functions within the commodity industry.

www.hslu.ch/commodity, www.hslu.ch/ifz, T +41 41 757 67 67, [email protected]

NEXT COURSE

START:

3 MAY 2018

In an efficient market, traders look to react as soon as new and relevant information comes to light. In the past, this was facilitated via a network of ‘contacts on the ground,’ tasked with manually counting trucks, observing crop quality, monitoring shipments, and pas-sing notes back to the trading desks. In the future, this will gradually be replaced with ubiquitous ‘eyes in the sky,’ powered by Artificial Intelligence and delivered in near real-time via APIs. Through necessity, this form of on-tap digital ‘intel’ may drive increased demand for algorithmic based trading strategies which can react au-tomatically to changing signals, together with access to marketplaces where risk can be managed electronically.

How do you see the different players along the commodity trading supply chain coming together? Can a company like the CME help with this process?Affecting change in any industry requires a degree of disruptive market forces. Whilst technology may be the catalyst for disruption within the commodity markets, it is less clear whether large incumbents will be the ins-tigators of change, or new entrants to the marketplace. My suspicion is that we will see a mixture, with new technology start-ups providing managed services into the larger less agile incumbents. As the world’s most diverse marketplace, CME Group constantly strives to help our clients leverage new tech-nologies and ways of trading. We are excited to be rol-ling out a portfolio of new alternative data sources which have been carefully curated and back-tested to ensure correlation with our commodity markets. These datasets will be made available electronically via our cloud-based DataMine portal alongside our traditional market data, and will provide new insights into the supply and de-mand for the underlying products traded at CME Group.

In addition to democratising access to emerging content, we will also make it ea-sier for commodity traders to connect directly to our electronic markets to manage their risk in real-time. This will be facilitated through the release of new web-based APIs and widgets, which will support both market data and order-entry.

Final question: how essential will the adoption of new technology (and the supportive framework conditions to allow this to happen) be in asserting commodity trading hubs in the future?CME Group can be viewed in different lights as both a marketplace for trading and as a technology provider. Whilst developing cutting edge tech-nology is a huge differentiator and a major factor in propelling and sustai-ning our markets, it is not the primary driver behind our success. The key to developing any marketplace is the health and vibrancy of the ecosystem which develops around it. As such, technological efficacy alone will not be the reason an exchange asserts itself on the world stage, but it may quickly become a prerequisite for getting on the guest list.

Interview Thomas Esdaile-Bouquet

New technological developments including AI, DLT, big data, deep learning and IoT, are taking hold in the commodity trading industry. What new opportunities do they present to commodity traders?All such emerging technologies have one thing in com-mon, which is that they are powered by huge and expo-nentially increasing amounts of data. From the use of sa-tellite imagery and AI to calculate daily oil storage levels, to geospatial data from mobile apps used to determine aggregate vehicular usage by country; traders now have unprecedented digital access to the world around us. There is a common statistic that ninety percent of the data in the world has been generated in the previous two years alone, which is unsurprising if you consider that internet-connected devices now significantly out-number people on earth. This trend holds true at CME Group too; our price feed alone now generates over five terabytes of data each day, yet our customers continue to seek access to new data sources which offer greater insight into our markets.All of this data creates a huge opportunity to derive in-sights which can better inform trading and risk mana-gement decisions, but it also presents a threat to those firms who fail to embrace the emerging technologies necessary to unlock its potential.

How easy will it be for new technologies and emerging data-sets to penetrate a predominantly paper-based industry? One of the biggest challenges in harnessing such data is that it is typically unstructured, disparate, and difficult to unify. Technologies such as Cloud and AI can help with this process, but data science expertise is often a prerequi-site. Sourcing reliable data in the first instance can also be problematic. This is especially true in physical commodity markets where data-science resources are limited and high value datasets are often held as proprietary assets rather than being commercialised. It is however inevitable that we will see an increasing number of new third-par-ty platforms emerge which attempt to democratise access to such data and tech-nologies. Consequently, as the barrier to entry lowers and the necessary techno-logy becomes widely available, more and more trading firms may start to embed these ‘digital insights’ into their standard trading processes.

How do you see such technologies and datasets changing existing business models within commodity trading?The frequency of new digital insights made available to commodity traders will substantially increase in the medium-term. Unlike real-time market data, such as the CME’s Globex feed which is timestamped in nanoseconds, the refresh rate of most sources of non-traditional data are presently measured in days or even weeks, but technological innovations will facilitate more frequent sampling and reduce this timeframe. CubeSats, which miniaturise satellite imaging technolo-gy, are a good example of this, and could lead to near real-time imaging of every square foot on planet earth within the next two years.

JuLie armstronG | Cme GroupThe promise of “commotech” and how

emerging data is reshaping commodity trading

interview

JULIE ARMSTRONG EXECUTIVE DIRECTOR, GLOBAL HEAD OF MARKET TECHNOLOGY SERVICES, CME GROUP

1997: Bachelor’s degree from the University of Kentucky2005 - 2008: Global relationship manager at Lehman Brothers2008 - 2011: V.P. of Sales and Head of U.S. Implementation at RealTick LLC2011 - Present: Executive Director, Market Technology Services, CME Group

The pace of innovation in the commodity trading industry over

the past year has been relentless. STSA recognises the transformative potential of new technologies applied to the industry. This has led to the development of the TRAFEC, a secure communication platform between banks and trading companies. The fast rise of commotech across all commodity classes makes technology an essential part of STSA activities. STSA is helping inform and organise the Swiss trading ecosystem, by making commotech a key part of the Commodities magazine, bringing experts to share their insights at the Trading Forum and through the launch of a dedicated work stream as part of the STSA trade finance committee.Many technologies are being considered by the sector and blockchain holds the promise of a cost efficient, more efficient and transparent supply chain. As new consortiums arise that aim to capitalise from this and other technologies, STSA will continue to work towards the dissemination and adoption of best practices and standards.

WHEN INNOVATION STRENGTHENS THE HUB

The better the question. The better the answer. The better the world works.

Are you supporting tomorrow’s deals with yesterday’s operations?Digital technologies challenge commodity markets and force you to transform your business model. We can help you evolve your trading operations and provide new approaches to work toward boosting your success.

ey.com/ch/commoditytrading #BetterQuestions

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Inserat_L_agefi_281x396mm_March_2018_V2.indd 1 05.03.2018 14:33:08

speCiaL edition | March 2018 | Commodities ||| RESEARCH & EDUCATION

On Tuesday February 27, 2018 the Trading Forum organised by the Swiss Research Institute on Com-modities (SRIC) Foundation took place in Geneva and celebrated its 10th edition. The forum hosted a

wide range of speakers including commodity tra-ders, politicians, professors, and NGO representatives. Through the years the mission of the Trading Forum has been to start dialog on the industry’s trending is-sues, exchange thoughts on the industry environment and anticipate upcoming changes. This year more than 120 professionals came together to share perspec-tives on business model disruptions and the impact of technology on a sector that represents just under 4% of Switzerland's GDP. Professionals from the various commodity areas and different parts of the supply chain discussed the latest developments in their respective sectors. The ove-rarching theme of the conference was how the in-dustry is becoming more and more interconnected. A change in geographical demand in one commodity no longer impacts that commodity only; on the contrary its effects will ripple through the industry, potentially completely changing its dynamics. Technology has made this integration across the industry spread much faster, forcing players like trade finance banks and ship-ping companies to completely reinvent their business models in order to survive. A highlight of the morning session was Gene-va State Councillor Pierre Maudet’s speech on the Swiss and Geneva trading environment. He stressed the policy makers’ lack of understanding of the com-modity trading industry and how despite strong efforts made by the industry there is still need for more dialog and transparency. Mr. Maudet followed

by mentioning that the State has an important role to play in supporting the industry by establishing and developing a supportive regulatory framework, avoiding any “Swiss finish”, anticipating challenges and driving action to overcome these. By doing this it will promote, defend and improve its economic ap-peal to trading companies.Now more than ever streamlined supply chains are improving traceability, sustainability, and overall trade in niche markets. Today, consumers have strong ex-pectations about the origin of the goods they consume and fair trade has become an important trend that transcends all sectors. Achieving this level of transpa-rency will more than certainly increase pressure on prices. In this context, traders are well positioned to meet the supply chain streamlining challenge. They will be able to better support producers and better meet the needs of consumers increasingly focusing on niche products. On the other hand, the development of advanced technologies such as low-altitude satellite imagery, blockchain, artificial intelligence (AI) and an ever in-creasing amount of data are completely changing how trading houses, banks and exchanges do business. Al-though blockchain has been taking over the headlines lately it was strongly emphasised that it is far from full implementation and that it is not the only technology that will impact the industry. On the other hand, AI and big data, which are much more developed, are currently changing how many things are done. Some of the main concerns brought up by the speakers were around implementation, regulation, costs, and getting everyone to work together. Also, although technolo-gy might solve many problems it might create new ones. For example, where is all the electricity for elec-tric cars going to come from? How are the batteries going to be recycled? How will the required metals be sourced? These are questions that will keep resear-chers busy and traders anticipating future market trends and bottlenecks in the years to come.Nowadays, given how fast information moves, discussing ideas once a year at the Trading Forum is not nearly enough. Ideas and concerns need to

be addressed daily. The SRIC Foundation aims to frequently convene its members around the same table and provide a bridging platform to build ac-tionable thinking, bring creativity and reinforce the Swiss trading ecosystem.

Tenth Trading Forum: bringing the industry together

WITH ACAMODITYTM, ACADEMIA, CIVIL SOCIETY AND COMMODITY TRADING CAN MEET ON AN UNINTERRUPTED BASIS.

Marchés Dérivés de Matières Premières 4th Ed.Yves Simon Delphine LautierECONOMICA420 PAGES - FRANÇAIS - ISBN-13: 978-2717852554

This 420-page book is a "bible" dedicated to commodity deri-vatives markets. The first 5 chapters cover: i) the specifications and characteristics of futures contracts, options, swaps and options products, ii) the management of price risk by future

contracts, iii) financial transactions (arbitrage and speculation) initiated on deriva-tive markets and counterparties required for hedging transactions; iv) besides hed-ging; other services developed by derivative markets; and v) price risk management by OTC derivatives.The last four chapters deal with more innovative topics, namely: (i) the dynamic management of price risk by options, (ii) the analysis of term price structures, inclu-ding those of non-storable raw materials, (iii) principles and modalities of market risk management by taking the example of a large agricultural cooperative, iv) the financialization of commodity markets.

Crude Volatility: The History and the Future of Boom-Bust Oil Prices (Center on Global Energy Policy Series) - Robert McNally2017 - 336 PAGES - ENGLISH - ISBN-13: 978-0231178143

Crafting a journey from the gushing Pennsylvania oil fields to today's fractious Middle East, Crude Volatility explains how past periods of stability and volatility in oil prices help us understand the new boom-bust era.

Oil's volatility has always had an impact not only the oil industry but also the broader economy and geopolitical landscape. Tracing a histo-ry marked by conflict, intrigue, and extreme uncertainty, McNally makes sense of how oil became so central to our world and why it is subject to such extreme price fluctuations. Price volatility has prompted industry leaders to undertake extraordinary efforts to stabilize oil prices. McNally, explains the consequences of the ebbing of OPEC's power, debunking myths and offering recommendations as we confront the unwelcome re-turn of boom and bust oil prices.

Wégoubri: un bocage au Sahel – Frédéric Baudin2017 – 208 PAGES - FRANÇAIS - ISBN-13: 978-2-9525980-2-6

Wegoubri describes the incredible agricultural and ru-ral development project carried by Henri Girard and his team in Burkina Faso. Many projects are content to provide one-off assistance by digging a few wells, creating a clinic or opening a school. The goal here is much more ambitious and yet realistic. It is a about

improving the living conditions of many villages, beginning with their living environment threatened with desertification, and then focusing on the training of populations on basic health and sustainability. At the heart of the project is a pilot farm where remarkable experimental work explores techniques to develop an agroecological system that can retain water and enrich the soil (STSA helped fund Barga, a farm in Burkina Faso also supported by Paysan Solidaire VD that uses this approach). Sustainable, economic and social development take on its full meaning here. This project is an essential example for "greening the desert"!

aLvaro araniBar, Student, Master of Science in Commodity Trading

WHAT IS THE SRIC FOUNDATION? The SRIC Foundation was created in Geneva in 2015 with the mission of being the progressive engine, bridge builder and reference platform that makes academic knowledge of the commodity sector de-sirable, accessible and purposeful. SRIC represents all stakeholders of the commodities ecosystem. Its members include academia, commodity trading companies, multinationals, civil society, and natio-nal and international public authorities. The SRIC works collectively with its members to advance academic knowledge in the industry. This collaborative approach increases awareness and builds stronger engagement with the public in ge-neral. It facilitates interactions that spark innova-tions, solutions and new opportunities. With time and as technology develops, the SRIC realised the need for an easy-to-access platform where aca-demic know-how and information is shared conti-nuously. Therefore, the SRIC decided to power ACAMODITYTM - a digital physical platform where the worlds of academia, civil society and commo-dity trading can meet on an uninterrupted basis. Open to everyone, the platform will be the leading academic knowledge resource and thought lea-dership platform in the commodities world.Using the tagline “Advancing knowledge in the commodity sector for the benefit of everyone”, the SRIC Foundation aims to become the driving force in commodity trading research, providing a solid basis for decision making in both the public and private sectors for the years to come.

ING Country Head Pierre-Emmanuel Aerts. Geneva State Councillor Pierre Maudet. Gunvor Chief Economist David Fyfe.


siLviane ChateLain Education & Training Manager, STSA

How creating a deep talent pool has helped structure the hub

Growing a trading firm in a fast-paced and constantly changing world requires adaptability, pa-tience, sound management prac-tices but also the ability to tap into a deep talent pool.

If we look back 10 years ago, the staffing challenge was immense for the entire industry. Not only were there very few competent people available but there were also few people with the required background. Operators often came from banks or from road hauliers; traders doubled up as support staff and new recruits often knew very little about the ins and outs of physical commodity trading. Needless to say, things look quite different today. Switzerland and more particularly Geneva can now boast of an unparalleled talent pool when it comes to commodity trading. All of the key functions that are required to run and manage a successful trading house can be found here, a key strength of the hub.As a result, there is no longer a need to scout talent in naval academies or abroad. Moreover, the com-modity trading industry has all the tools at hand to further train and hence help retain its staff. This has proved fundamental as whatever the role, pro-files have become ever more specialised while staff

needs to be flexible; a trend that continues to this day and that requires a different mindset from back in 2000. This, however, did not happen overnight.

CREATING EDUCATION & TRAINING PROGRAMMES THAT MEET INDUSTRY NEEDSSTSA, with the commodity trading industry, has developed a full-suite of specialised education and training programmes locally, becoming the refe-rence for commodity trading education. STSA was key in the launch of two academic pro-grammes, starting from 2008, and developed with the University of Geneva. The recently rebranded Master of Science in Com-modity Trading, offers a multidisciplinary pro-gramme combining an academic curriculum with workplace experience for students with a Bache-lor degree. The Diploma of Advanced Studies in Commodity Trading meanwhile is best suited to professionals already working in the industry and looking to strengthen their professional skills with the best of academic knowledge. Most recently, the programme was adapted for overseas professionals and exists now in a format combining online courses.Those academic education programmes ensure that graduates are well-rounded and can think critically and act efficiently once in employment, having followed a course designed to equip them for managerial roles.Through strong cooperation and constant ex-changes with STSA, the curriculum of all these programmes are frequently revisited ensuring that both staff and company stay abreast of develop-

ments, changes of law and regulations and retain their industry leadership. STSA also trains a number of junior staff entering the industry every year through the STSA Operator’s Certificate programme that has been running for over 5 years and complements the academic offering with a more tailored education.This specialised training course is practical minded, focusing on the consecutive steps that make up a physical commodity transaction and includes a field study trip. After all nothing beats first-hand exposure to trading activities. The programme is in very high demand by companies recruiting their juniors from the pool of alumni. Adapting to the new needs of the hub, STSA launched recently a risk analyst certificate with middle office positions in mind. The course offers access to the experience of high-skilled professionals. When it comes to support staff, trading companies seek to hire great professionals with a mastery of their functional area, whether HR, legal or accoun-ting, just to name a few. But they still need to gain sector knowledge and this is where tailored courses such as the STSA Commodity Trading Fundamen-tals course make a huge difference. STSA’s training offering is revisited constantly, en-suring that both staff and company stay abreast of developments and retain their industry leadership. By leading the commodity trading education and training offer in Switzerland, STSA contributes to reinforce the local hub and ensure the competitive-ness of Swiss commodity trading houses in their daily activities. Indeed, talent management is key to a smooth transition to the next generation.

ALL OF THE KEY FUNCTIONS THAT ARE REQUIRED TO RUN AND MANAGE A SUCCESSFUL TRADING HOUSE CAN BE FOUND HERE, A KEY STRENGTH OF THE HUB.

Advancing knowledge in the commodity sector for the bene� t of everyone.

_ the catalyst for the commodities world.

SRIC Foundation, Swiss Research Institute on Commodities 24, rue du Général-Dufour, 1204 Genève, T. +41 (0)22 715 29 93, E. [email protected], www.sric-foundation.org

A project supported by:

SRIC_Foundation_Banner_281x100.indd 1 12/03/2018 11:18

Litasco has been present along the shores of Lake Geneva since 2000 when the office ope-ned with about 15 staff, half of which were traders. It has grown over the years to open about 250 employees today representing over 30 different nationalities. Since its opening, the company has encou-raged all employees to make use of various trainings for the completion of their work du-ties and to improve their performance, cove-ring the areas of soft and hard skills, profes-sional development and specialised courses applicable to their speciality. This commitment is reflected locally by the creation of an edu-cational partnership with STSA and key Gene-va institutions to develop specialised industry education programmes. 15 years ago, most of the profiles and em-

ployees were found abroad and hired from foreign companies. Specialised Operations training was at that time mainly available in London. As a founding member of STSA, and together with the Association and the Univer-sity of Geneva, we have thoroughly supported the local development of a specialised higher education offering both academic programmes and professional trainings. Our management has since the origin of this new and unique type of learning been directly involved as speakers or lecturers to a number of courses, which has contributed to prepare the students and employees for real industry life situations. We believe that our commitment has locally supported the growth of the commodities trading industry and its key regional sup-port businesses.

EDUCATION AND TRAINING: THE FOUNDATIONS FOR SUCCESSFUL BUSINESSLitasco figures on employees involved in industry programmes since 2008

Master of Science 15since 2008

Diploma of Advanced Studies 14since 2008

STSA Operator’s Certificate 5since 2013

STSA Commodities Trading Fundamentals 12since 2014

Total number of students 45Of which Swiss nationals 18

A vibrant testimonial from one of the largest Swiss based companies


(DBP): In the food industry, as well as fashion, consumers show an increasing interest in knowing where these goods come from and under what conditions they have been produced. Often brands' sourcing practices need to be revised to reduce pressures on the producers. Academic research could help to identify best practice examples for supply chain transparency.(DR): We need to be careful with definitions. Sustainability means production of goods preserving the quality of life of the next ge-nerations. There is an issue within the trading industry as it wants a standard and a predictable product obtained in a sustainable manner. The risk of standardisation is quite high and it imposes an extra burden on producers. In the palm oil sector, a lot of small producers have been left out facing this vertical sustainability – as opposed to the more accepted global sustainability. In order to see a positive change occur, there ought to be end-to-end incentives across the value chain – commodity trading is merely most often a conduit or mirror of consumer demands and/or production mechanisms.How can academic research and its popularized translations shed light to issues that need to be addressed in a transversal way? Do you think academic research and the SRIC’s platform of initiatives can help rein-force the commodity trading ecosystem and its competitiveness?(DBP): I think commodity trading can and needs to play a more proac-tive role than merely mirroring consumer demands, particularly since the industry is not consumer facing. The SRIC platform creates an op-portunity for the industry to explain its business practices, reflect on these and adapt them to what is considered socially acceptable.(DR): I agree. In the fundamental flow, production drives the consumption and not the other way round. The main actor is really the trader that should not ask too much on the customers’ side. This industry must be more proactive instead of being responsive. The Business and Human Rights agenda and more specifically the consideration of corporate responsibility and accountability have emerged as an area where commodity trading firms are looking to take a proactive stance.How can academic research help raise the profile of matters in Business and Human Rights in commodity trading?(DBP): Research could independently assess the business practices of the industry and highlight how they affect human rights.(DR): Again, commodity traders really need to get to a more proactive approach in terns of research, not necessary the other way around. Do they want to be part of the game? The pace of innovation is frantic and commodity trading is looking to harness new technologies to increase efficiency and traceability, to lower costs and deliver better service.Do you see technology as a game changer for the industry? Where do you see academic research progressing in parallel to advancements in innovation and technology?(DBP): I am not a tech expert. However, I believe that technology can help to increase transparency. The data that technical tools generate, however, still needs to be analysed by humans who ask the right questions! (DR): Technology is changing the game. On the production side, with accurate information through satellite images and swift dis-semination. On the financial side with all the leaks. On the retai-ler side with applications screening product quality. In summary, technologies are having a huge impact on supply chain transpa-rency and accountability, including on commodity trading. Howe-ver, new technologies may also be used to go towards even more standardised production systems.

Which competencies do you expect to be required in the academic world (teaching, collaborating and researching) in order to address the needs of a constantly adapting industry?How would the SRIC be positioned to be at the leading edge of knowledge and insights that set the transformation agenda for the industry?(DBP): The SRIC could be a platform to formulate the key ques-tions that will shape the future of the industry. It could invite acade-mic research and multistakeholder engagement on these questions.(DR): I guess academics need to have a broad understanding of the political trends, a good knowledge of the supply chains, and be versatile in bridging research with commodity hard reality. It is about having legitimacy, getting the trust and networking in good faith with all in a rather secretive field.

Interview Elsa Floret

Commodity trading plays a central role in almost all sectors of the physical economy’s value chain.In your view, what is the state of academic research on commodity tra-ding? What are its main challenges?Dorothee Baumann-Pauly (DBP): Academic research on aspects of commo-dity trading cuts across several academic disciplines and assessing the state of research generally is hardly possible. Most existing research focuses on opti-mising the trade and finance. In my area of business and human rights, there is no specific research yet on the role of the commodity trading sector. I think the main reason for this is the fact that commodity trading is a B2B business and not consumer facing. The industry has experienced less pressure than other sectors in the past, like manufacturing. This is changing now.Denis Ruysschaert (DR): I focus on the social and environmental im-pacts of agricultural commodities and mining extraction. In those sectors, most of the research has focused on both ends of the sup-ply chain, either the producer of the commodity or the end producer of goods and retailers. Trading has been overlooked, even though this is the bottleneck in the supply chain. Traders are quite reluctant to participate in improving the supply chain and try to hide themselves behind the role of broker, even though their activity needs to be incor-porated. Otherwise their responsibility can never be called. However, things are moving in the right direction, thanks to the financial sec-tor which is trying to deliver some guidelines for a better interaction and some governmental policies that force due diligence.

The Swiss Research Institute on Commodities (SRIC Foundation) brings together all stakeholders (business, academia, government, civil society) concerned with commodity trading.How can the SRIC become the catalyst to high quality and respected academic research and actionable thinking?(DR): Such a research should have at least three characteristics: first, it should tackle the key hard issues that commodity trading is facing; se-cond, it should be undertaken in an independent manner; this includes an open participatory process to select the topics, team, and to manage it. And third, an inclusive and open process to review the draft results.(DBP): The SRIC platform can be useful under two conditions. On the one hand, the industry must be open to communicate its real business challenges to enable academics to work on practical-ly relevant topics. On the other hand, academic research results must also be actionable and not only publishable (which is the key requirement in the academic world). What avenues are there to build bridges between industry stakeholders at this time?(DR): The NGO world is growing and becoming more diverse, with a trend to go from public awareness to scientifically sound facts supporting advocacy. I observe the will of the University to be much closer to society.

Commodity trading, given its essential and central connective role along the supply chain, touches a great many ancillary sectors, from extraction to manufacturing and distribution, and therefore their associated issues.From your perspective which areas are ripe for more in-depth research in the coming years?(DBP): As I said earlier, there is no human rights research in com-modity trading as of yet. However, the centrality of flow of goods is unique and as such bears a unique responsibility. In the manufacturing industry, brands have started addressing human rights issues decades ago. The trading industry is part of commodity supply chains and there is a public expectation that it also contributes its share to solutions. (DR): Commodity trading is about transport, and therefore ob-viously contributing to climate change. With the existing am-bitious targets to reduce green-house gas emissions, the climate agenda is therefore the main issue. Waste is the second hot topic. Commodity trading has open the material life cycle, with produc-tion there and waste here. But how can we justify the global com-modity open supply chain? What we need is a circular economy. This is an issue in the agricultural sector as well as in mining ex-traction. Third is human rights, I see two issues: inside the supply (how it is produced to end customers), which is under discussed, and outside (the impact of trading on ecosystems).

Maintaining consumer trust in some industries (food and beverage for ins-tance) and increasing concerns on sustainable sourcing and quality control demand a higher degree of sustainability and traceability guarantees.How can academic research contribute to more sustainable supply chains? Do we have practical examples to build on? How could interactions between universities and businesses advance agendas on sustainability and traceability?

dorothee Baumann-pauLy & denis ruyssChaertnyu stern & swissaid Geneva

How the SRIC’s activities can have an impact on commodities trading

interview

DENIS RUYSSCHAERT 1997: Engineer, Suez environment 2001: UN diplomat, published: "UNEP and civil society: Natural Allies" 2007: International director, PanEco2013: PhD in sociology, political ecology2015 - Present: Vice-President SWISSAID Geneva

DOROTHÉE BAUMANN-PAULY2010: PhD in Economics from the University of Zurich 2013 - Present: Director of Research at the NYU Stern Center for Business and Human Rights • Teaches Business and Human Rights, Business Ethics, and Corporate Social Responsibility at NYU, HEC Lausanne, and the University of Geneva • Multiple years of experience working for Multi-Stakeholder Initiatives like the Fair • Co-edited the first Business and Human Rights Textbook in 2016

the dawn of a new era - unige international trading · global trade volumes are on the rise....

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