Coronavirus infects commodity markets: Why the sector needs to embrace digital transformation now

Nothing demonstrates the volatility of commodity markets better than the above title. In just a few days, the virus went from a serious problem in China to a global health emergency impacting more than a dozen countries. As the coronavirus spreads, there is a cascading effect that runs through commodity markets, disrupting commodity trading across the globe.

• Oil prices slumped to a 3-month low in response to the widening spread of the virus in China, the world’s top oil importer.
• Opec may extend current oil output cuts until at least June and consider deeper cuts if oil demand is badly hit.
• Flights in and out of China were cancelled, depressing jet fuel prices and production margins in Asia and hurting refiners and fuel exporters.
• Palm oil prices tumbled as traders reacted to China closing offices, malls and factories. China is the second largest palm importer in the world.
• Prices for key industrial raw materials such as copper, iron ore, nickel, aluminium and liquid natural gas declined sharply.
• Base metals slumped as Toyota and other manufacturers announced extended plant shutdowns.
• Grain markets slid sharply.

The disruption has left commodity businesses stunned.

Speed is essential
Commodity markets have always been unpredictable, and disease outbreaks, extreme weather, fast-spreading viruses, geopolitics, and trade wars can dramatically swing markets in just a few hours.

At the end of the day, the one certainty in commodity markets is that speed is essential.

Commodity trading companies cannot afford to wait days or weeks to analyse shifting markets. They need to study the situation as it occurs, so they can create a plan to capitalise on opportunities, minimise losses, or mitigate risk.

Studying markets is a time-consuming process. It requires a lot of data collection and manipulation, which is typically done on spreadsheets or legacy systems that are not designed to respond with speed. They do not provide real-time visibility into coverage or the impact of market shifts on company portfolios. Managing risk on spreadsheets requires a lot of manual effort that often opens the door to human error and increases risk.

Against a backdrop of constant volatility, commodity businesses need to take advantage of the latest technologies – and this is where the problem lies. Digital forces are disrupting a wide range of industries, but the world of commodities remains stuck in the analog age. The inability to connect the dots between systems, data and people puts commodity trading companies at a real disadvantage.

What the commodity industry needs is a platform-driven solution that is agile and helps businesses achieve the speed they need to thrive in volatile markets.

Data is crucial
Platforms, by design, provide real-time access to critical data residing in multiple systems within a business – market feeds, weather reports and inventory positions.

When businesses can automatically aggregate data from excel sheets, broker statements, CTRM systems and more, they can run fast and accurate analyses for a deeper understanding of their business.

This is where advanced analytics play a pivotal role. With real-time data and advanced analytics driven by machine learning algorithms, businesses can detect anomalies instantly. With anomaly detection, users can understand commodity price movements in a way that allows them to simulate the anomaly and assess the impact of disruptive events on the business. The business can prevent anomalies from recurring and determine the optimal strategy to manage market shifts and maximise profits.

Trading profitably in uncertain markets requires a careful evaluation of all variables. The sheer number of variables is too big for manual analysis. However, with sophisticated analytics, businesses can analyse this data quickly and effectively. They can analyse both structured and unstructured data – including weather feeds, market information, supply chain variables, market sentiment, and more – to evaluate dozens or hundreds of possible choices and make the best, most profitable decisions. Even better, they can do these simulations at any time, in any place, by using simple apps on a laptop, tablet or cell phone.

Putting this in context of the subject, if contracts with Chinese businesses are in jeopardy, a platform-driven solution allows traders to pull in data from all their sources instantly, study historical trends with a few clicks, and simulate different outcomes. They can quickly evaluate if they should sell to other markets, reallocate their products or wait until prices recover.

Making faster, smarter decisions is really about having access to the most current data at all times. There is little you can do to stop disease outbreaks, natural calamities or trade wars from happening, but you can prepare your business to weather these storms with technologies that are future ready.

Manav Garg is CEO and Founder of Eka Software Solutions.

This article was first published on CNBC TV18.