Gaspard Duguet: the Role of Technology in the Transformation of the Commodity Trading Industry

Gaspard Duguet, Product Manager, Kpler

“Trading in fuels, metal, livestock and agriculture is fundamentally important to human existence. These four categories of commodities comprise all of the raw materials we need to produce energy, construction materials, textiles and food. The entire economy is dependent on the supply and demand of these goods and any disruption to their trade could have catastrophic effects for billions of people.

However, though the movements of the commodities market affect us all, trading has typically been under the control of a few large organisations with access to the necessary capital and — even more importantly — quality information to enable them to make the right decisions. Until the very recent past, this intelligence was restricted to industry insiders who had built up large networks of sources, each of whom could provide insight into the movement of various commodities.

This process, though, was full of risk. An individual source would only have a tiny part of the picture, meaning traders had to put the jigsaw together themselves. Information would often be of questionable accuracy, as it was days or perhaps even weeks out of date. Around the beginning of the 21st Century, though, things began to change. Advances in technology helped to boost the accuracy and immediacy of data, as well as increasing the number of reliable sources.

These advances have been the catalyst for revolution in the business of commodity trading. At the centre of it all are independent, trustworthy data firms that have transformed the process of intelligence gathering. Reliable, comprehensive data is now accessible for organisations of all sizes — not just the major players — leading to a genuine democratisation of the entire industry.

Data science becomes increasingly important for traders

Commodity prices vary due to a number of different factors. In order to make optimal trading decisions, traders need to be aware of things like commodity production, inventories, flows and consumption. But data about these processes comes in a variety of different formats from hundreds of sources, such as newsfeeds, customs, port authorities, shipping agencies and satellites.

Tracking all of these sources and cross-checking the information is a complicated task, and larger traders may have entire departments dedicated to doing just this, employing teams of data scientists and market analysts. There is also now a place for independent data and analytics firms, making intelligence available to traders of all sizes through technology-driven solutions. These solutions have been developed by data scientists alongside market analysts with the needs of traders in mind, giving them access to up-to-date insights by aggregating millions of data points and using technologies such as Artificial Intelligence and Machine Learning. These insights can then be used by traders to inform their transactions, reveal new opportunities, analyse market trends and keep tabs on their competitors.

Technology hasn’t just streamlined the process of market analysis for commodities traders by improving the reliability and quality of market information, but also increased the number of sources that they have at their disposal as well. Satellite imagery is now used to track the movement and storage of commodities such as crude oil from space. The images can be scanned to pinpoint the capacity utilisation of storage tanks, and an even newer technological innovation — drones — offers even further details that can be of invaluable use to a trader. By fitting infrared cameras to these drones, it is possible to see how much crude oil is in a storage tank at any moment in time.

Technology as a problem solver

Technological innovation also has an important role in solving problems that affect the smooth trading of commodities worldwide. For instance, the blockage of the Suez Canal in early 2021 could have provoked substantial commodity shortages if it had happened in the 20th Century. However, data-driven tracking technologies enabled traders to immediately respond to the issue by rerouting vessels. By being flexible with their strategy, informed by up-to-the-minute intelligence, stakeholders minimised disruption to supply chains and end consumers were largely unaffected by the incident.

However, the digitalisation of commodity trading isn’t something that should be happening indiscriminately. Only when there is a compelling case for technological solutions should they be used — in most cases, problems are best solved by taking an agile, straightforward approach. Trying to use the most expensive and advanced technologies to solve problems isn’t always appropriate.

Technology’s role in the future of commodity trading

While technology has unarguably changed the way commodities traders operate, it is the effect that technology will have on the future of the industry that will be most significant. As the world looks to meet ambitious ‘net zero’ targets by 2050, the commodities trading industry will need to dramatically lower emissions and reduce its carbon footprint. This is going to have an impact on everyone in the value chain from producer to consumer, and data analytics will play a key role in helping stakeholders in every industry make greener decisions.

The energy industry will be particularly affected, with a growing reliance on alternative energy sources like solar, wind and tidal power, as well as biofuels and hydrogen. All of these markets will need to be accurately tracked, as fossil fuel consumption decreases and the use of biofuels and hydrogen will go up. The tracking of carbon emissions will be all-important — currently there is a large reliance on self-reporting and there are few agreed industry-wide standards.

The digitalisation of commodity trading will benefit us all

By giving traders more accurate and more timely information, technology has had a positive impact on global trade and improved access to the items humanity needs to survive for just about everyone on the planet.

But in terms of the big picture, the digitalisation of commodities trading is only just beginning. Transitioning to meet net zero targets will rapidly advance this process, meaning that key players will have improved access to reliable data, helping them to make better decisions. This can only be of benefit to humanity, ensuring the global economy continues to function while providing us with the necessary information to reduce carbon emissions and mitigate the effects of climate change.”