Chaos management

In the years leading up to the financial crisis, commodity markets were seen as the poor cousin of the stock market. Since markets were fragmented, prices were more or less stable and profits were considered to be little for commodity traders as compared to the windfalls that stock markets promised.

Speculators flooded the commodity markets after the 2008 financial crisis, for profit taking, leading to explosion in transaction volume and price volatility. Crude Palm Oil prices reached a high of $1,350 (RM 4,312) per metric ton in March 2008 before plummeting to as low as $437 (RM 1,390) in October that same year. With the increasing imbalance between growing demand and limited supply, commodity markets have become highly unpredictable, where fortunes can be made or lost in a single day. Commodity traders need solutions to give them visibility on their exposures, be able to simulate worse case scenarios and take corrective actions.

Trading companies in Asia have also witnessed the huge losses due to lack of trading controls, wrong decisions and ignoring operational risks. The industry has seen China Aviation Oil lose $555m due to lax controls and Mitsui Oil lost more than $50m as a result of a risk manager falsifying trading accounts to hide trading losses. Operational risk management, if not managed properly, has the potential of inflicting huge losses and creating non-compliance problems for the management. The need of the industry is automation of the trade life cycle with pre-defined limits and controls.

In the aftermath of the 2008 financial crisis which saw oil prices crashing, many buyers opted to default on their contractual obligations. This left many sellers high and dry with huge floating inventories for which there were no buyers and piling demurrage charges. This can be managed with good counterparty risk and exposure management.

Where companies once managed their trades either manually (through mountains of paperwork) or through in-house developed solutions addressing bits and pieces of their requirements, top management is beginning to realise the value in adopting trading and risk management solutions providing integrated platforms for trade lifecycle, supply chain and risk management. In its recent Global CTRM ‘Market Sizing Study’, CommodityPoint estimated over $290m was spent on CTRM software in 2010 and that is forecast to increase to $321m in 2011, representing a healthy growth rate of approximately 11 percent.

Moreover, taking into account associated services and peripheral software sales; the broader CTRM software market is in excess of $2bn globally annually.

Risky business
There are many types of risks faced by companies dealing with commodities – counterparty risks, market risks, material risks and operational risks. CTRM software, such as JustCommodity’s award winning ContraXcentral, helps in minimising risks by automating business processes and enforcing controls. The system incorporates several functions such as trade lifecycle management, supply chain management, and risk management, all of which work towards improving operational efficiency, mitigating risk and administering better cash flows.

CTRM systems enables controls like trading limits, credit limits, price limits and others to pro-actively alert management of any potential pitfalls. Trading strategies can be defined and enforced to maximize profit with minimum risks.

CTRM software takes care of operational risk through its efficient online system processes. These processes reduce and, in many cases, eliminate human error by ensuring that all data has a single entry point and is stored in a central repository. Operational risk is also reduced by automating the recording of loading, receipt and delivery timings for physical goods. In addition to reducing human error, systems also provide the added benefit of simplifying audit compliance, report collation and report generation – both notoriously tedious time consuming activities.

Driving commodity markets
Innovation is an important aspect in every software businesses’ growth especially in a market as volatile as commodities. It is just as important for firms to provide a solution in response to current problems as it is to constantly modify and predict solutions which can solve predicaments in the future.

Keen foresight in technology development is essential for survival and vendors who keep abreast of new and potential market developments will flourish. There is a very strong need for CTRM software, not just to manage volatility in the market, but also in the day to day operations of any trading company.

Asia is set to grow at a rapid pace in the coming years as investment funds move out from fragile Western economies and, while most CTRM providers are located in the West, one vendor stands out as a potential giant in the Asian market. Already in its tenth year of operation, JustCommodity is optimally positioned to service these markets. The company strongly advocates innovation in its software development and already boasts a stellar clientele including several on the Forbes Global 2000 list. In this highly volatile environment, it falls upon vendors, such as JustCommodity, to provide the tools necessary for traders and managers to make sense of the chaos.