Overcoming a Volatile and Uncertain Market · 2020. 5. 19. · involving changes in capacity, cross...

CONSTANT CHANGE HAS LED TO UNCERTAINTY AND VOLATILITY

Are Commodity Businesses Ready?

It’s a given: Commodity businesses face increasing uncertainty and change on a daily basis. To some extent, it’s always been this way. However, over the last few years, the degree of uncertainty and pace of change has dramatically increased, exposing firms to greater risks, unpredictability, and volatility, as geopolitical disruption has played a significantly larger role than ever before.

Issues like Brexit, politically-motivated sanctions, the imposition of tariffs, and the potential for trade wars all contribute to the disruption, along with a more stringent regulatory environment and industry structural change. Commodity-dependent business can be significantly impacted by these events — or the uncertainty surrounding them — and must manage these risks as effectively as possible. At the heart of this ability to respond on a timely basis to such events, manage and control risk, and take advantage of any opportunities that arise, is an adaptive, scalable, and best-of-breed IT infrastructure and software architecture that incorporates a state-of-the-art C/ETRM solution powered by advanced analytics.

This white paper explores the current environment of uncertainty and reflects on the solutions required to aid businesses in navigating this uncertainty, now more than ever before.

Overcoming a Volatile and Uncertain Market

How Commodity Businesses Can Adapt and Scale in an Ever-changing Market with Next-generation Commodity Management Software and Advanced Analytics

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Constant Change Has Led to Uncertainty and Volatility

Uncertainties Abound

Structural Change

Changing Regulations

Now Is the Time for Advanced Analytics for Commodity Management

TABLE OF CONTENTS

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UNCERTAINTIES ABOUND

The U.K. Brexit

With Brexit, much remains unclear as to how the U.K.’s departure from the European Union will impact commodity businesses. This impact could span across the entire gamut of issues from supply and demand, customs, and tariffs, to the details of the regulatory environment that will govern future trade.

Much has been written about the potential implications of Brexit on commodities, ranging from energy to palm oil, but the truth is that much of this is simply speculation and the only consistent aspect of Brexit is sheer uncertainty. There are even some who still believe Brexit may not happen at all, although the U.K. government seems committed to leave the EU under any circumstances.

At this stage, observers require a crystal ball in order to have any ability to predict what may happen.

The U.S. Administration

Meanwhile, the U.S. administration has brought about significant uncertainty for commodity industries. In his first year-and-a-half in office, President Trump altered many international treaties and agreements, including withdrawing from the Paris Agreement on climate change, pulling out of the Trans-Pacific Partnership trade treaty, and initiating talks to renegotiate the North American Free Trade Agreement with Mexico and Canada.

The president’s decisions to withdraw from the international nuclear agreement with Iran and engage in trade disputes with the EU, China, and other trading partners also created significant uncertainty. Furthermore, in reinstating sanctions against Iran and also targeting certain Russian oligarchs with increased sanctions, the administration has created more confusion and uncertainty on world markets.

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The Deripaska Sanctions

Take for example, the sanctions against Rusal’s biggest shareholder, Oleg Deripaska, and hisassets. These sanctions effectively banned Rusal from doing business in U.S. dollars and thus from exporting aluminum to America. A Russian oligarch targeted by sanctions, Deripaska and his stake in Rusal has taken on greater significance amidst global uncertainty and volatility.

The sanctions against Deripaska effectively forced the world’s second biggest producer of aluminum to find new markets and resulted in significant disruption to the supply chain. Aluminum prices jumped overnight, a Rusal plant in Ireland was suddenly faced with the prospect of closure, and Rio Tinto had to seek new buyers for its alumina.

The sanctions also impacted the broader industry, including Glencore, and resulted in the resignation of the Glencore CEO from Rusal’s board. This disruption prompted the U.S. to reconsider the sanctions against Deripaska and Rusal, extending the deadline by about five months.

The U.S. encouraged Deripaska to sell his stake in the company in order to avoid further disruption. Aluminum prices rose almost one-third before falling around 10 percent, as the U.S. extended the deadline.

The Impact of Tariffs

Around the same time, the U.S. also announced tariffs on aluminum (10 percent) and steel (25 percent). Despite initially sparing Mexico and Canada, the U.S. moved to impose the tariffs on these two countries and the EU.

While deals have been reached with other nations that involve restraining metals shipments, the tariffs are set to have a broad impact on supply chains and prices and will disrupt supply and demand fundamentals. In return, the impacted nations vowed to respond with their own sanctions, while appealing to the World Trade Organization against the “protectionist” measures taken by the United States. As a result, steel prices in the U.S. rose sharply.

Should the tit-for-tat imposition of tariffs extend into a prolonged trade war, many commodities and commodity supply chains may also be impacted.

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Uncertainty in Iran

Meanwhile, the re-imposition of U.S. sanctions against Iran has also created turmoil. Ever since the Iranian nuclear deal was signed in 2015, many European, Asian, and Russian firms have ventured back to Iran, including the French oil giant Total, which has taken a large stake in the Iranian upstream sector.

Many firms and governments are now scrambling to understand the impact of a renewal of sanctions and protect their investments in Iran. The potential loss of Iranian crude to the world market has also resulted in increased volatility in oil prices, although there does seem to be more than adequate supply in the short-term. The increased uncertainty and resulting volatility has made the most impact.

Continued Geopolitical Risk and Uncertainty

With respect to the Paris Agreement, President Trump claimed the accord would cost 6.5 million industrial jobs, as well as lost production across many segments of industry. In tandem with this move, the U.S. administration has made steady progress in removing a number of environmental, pollution, and other restrictions on the energy industry. These moves are broadly seen as encouraging coal, oil, and natural gas production, while potentially having little impact on renewables.

In many ways, these moves could be viewed as good for energy commodities, but with widespread political and state opposition, the result is increased uncertainty. Elsewhere, of course, governments are moving in the opposite direction, seeking to expand renewables and curtail fossil fuels with, for example, the U.K. closing all coal-powered generation by 2025.

The last couple of years in commodities has seen an unprecedented level of geopolitical risk and uncertainty. In many respects, the impacts cannot be known, yet those impacted by these potential risks must set up contingency plans and manage a multitude of new risks. In the meantime, increased price volatility is to be anticipated.

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STRUCTURAL CHANGE

An interrelated issue is structural change within commodity industries globally, where a combination of increased regulation and scrutiny, rising costs, and complexity are forcing traditional industry roles to morph and shift. Nowhere is this more seen than within European energy, where EU- and state-driven initiatives have resulted in a large shift in generation mix. As the EU has sought to meet targets for CO

2 emissions, it has championed a migration to unpredictable renewables and away from dirtier fuels

like coal and lignite. After the Fukushima disaster, Germany announced an end to nuclear generation, shutting down 17 generation facilities by 2022. Meanwhile, as previously mentioned, the U.K. is committed to removing coal generation by 2025.

Far-reaching Changes

As these changes in generation mix have occurred, the EU has sought to create a single energy market, involving changes in capacity, cross border connectors, market coupling, retail competition, and more. The impacts of this have been far-reaching and include, amongst others;

1. Reduced trading profitability as basis and price differentials have lessened with fewer market imperfections, while costs have increased,

2. An increased burden on utilities and generators that have seen traditional business models shift significantly with issues such as negative power prices, virtual power plants, increased costs associated with fossil fuel or nuclear generation assets, uncertainty around where cash can be found for necessary investments in infrastructure as profits erode, and the rise of prosumers mandates changes both in infrastructure and business models,

3. A movement from longer-term trades to real-time, intraday trading, which may involve trade automation, real-time optimization of assets, forecasting, and scheduling,

4. The development of distributed production and consumption within the context of a smart grid and the Internet of Things (IOT).

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The structural changes taking place in European power and gas markets are eroding traditional roles. The historical role of the asset holder is changing due to the increasing securitization of assets, the use of virtual assets, and aggregation or disaggregation of assets. Other market entrants such as hedge funds and others that can offer services like data provision, analytics, financing, and algorithmic trading are also challenging the traditional merchant trading model.

The Entrance of New Technology

Similarly, the use of new technologies is now also challenging traditional business models. Distributed ledger technologies such as blockchain, for example, are being looked at in many areas from commodity supply chain traceability, peer-to-peer trading, back office applications like settlements, and in the context of trusted ownership of commodity assets in warehouses and in transit.

While it is still the early days and there is significant hyperbole around these new technologies, they are likely to challenge traditional business processes and systems in many areas of the commodity markets over the next decade. Other areas of disruptive technology include artificial intelligence and machine learning, which is being deployed in areas ranging from automated trading to the predictive maintenance of assets.

Big data and visualization are other areas of rapid technology adoption, where technology is deployed to detect trade sentiment, improve weather forecasting, and much more. All of these technologies are challenging traditional industry processes and structures and are resulting in more uncertainty in the near-term.

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Changing Regulations

While much of the uncertainty regarding regulations has now been resolved, regulations are still being tweaked and improved with changes like REMIT and MiFID2. These regulations have increased costs and risks, and regulators have started enforcing them, often levying large fines for market manipulation or incorrect trade reporting. Regulatory risk has increased cost and complexity and added some degree of uncertainty to commodity markets, while providing a further driver for structural change.

Over the next several years, we will continue to see structural change in the industry with the adoption of new business models and business processes. The steady migration from bilateral trade to exchange-cleared or exchange-based trading is one aspect of this, as is the move to automated trading.

At the same time, many commodity businesses are seeking to draw suppliers and customers closer by utilizing a variety of new services often delivered via internet-based platforms offering market access, trading, data and information, and much more. Finally, traditional utilities are often under pressure to divest themselves of dirt fossil fuel-based generation in favor of renewables.

Adaptability: The Key to Survival

For the sake of brevity, this paper has only touched on a few of the many changes facing commodity industry actors. The recurring themes of these changes is uncertainty and volatility, and survival will be based on being able to adapt and exploit new opportunities while keeping down costs.

A key aspect of adaptability will lie with the IT infrastructures, architectures, and systems in use across the industry. More than ever, these need to be flexible and offer the ability to support the business, adapt to change, and thrive from it. For any company trading or buying and selling commodities, the heart of the IT landscape will always be the commodity management software deployed. Increasingly, this software needs to be a solution that can provide adaptability, scalability, and help manage increased volatility, uncertainty, and risk.

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TAKING TOTAL CONTROL WITH NEXT-GENERATION COMMODITY MANAGEMENT SOFTWARE AND ADVANCED ANALYTICS

Despite all of the complexity and uncertainty in the market, some organizations still rely on spreadsheets, their own homegrown software, or outdated CTRM software solutions for commodity portfolio management. In an ever-changing industry, these so-called solutions are problematic for many reasons, ironically opening businesses up to even more risk.

The truth is there’s a better way to manage commodities, harness data, and grow businesses. Forward-looking organizations are turning to next-generation commodity management software and analytics for decision support and risk management.

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What Is Next-generation Commodity Management Software?

Next-generation commodity management software offers data-driven- decision support to better manage position visibility, risk management, controls, and regulatory compliance — on one platform, all powered by a full suite of comprehensive, world-class analytics tools. To go a step deeper, here’s a look at legacy CTRM software against next-generation software:

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BUSINESS OUTCOME

HORIZONBUILT FOR THE CLOUD Data-driven decisions

Easier upgrades — your processes move forward in the core solution

Best practices from 280 tier 1 customers — out of the box

Pay for what you need

Standard CTRM Software

Static reports

Custom branch or scripting outside of the core code for unique business processes

Vendor-determined business process flow

Monolithic code base

Advanced analytics

Configurable software within the core code to match your unique business processes

Market-based business process best practices

Product/component architecture


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NOW IS THE TIME FOR ADVANCED ANALYTICS FOR COMMODITY MANAGEMENT

Data-driven Organizations Stand to Gain the Most in a Complex and Volatile Market

The commodity industry is at a proverbial tipping point today. The market has never been more volatile, more complex, or more uncertain than it is now.

With the commodity industry at this tipping point, organizations can’t afford to put off something as important as analytics. Make no mistake about it: Data-driven organizations will be the ones who reap the most from this volatile and complex market.

A study from MIT’s Sloan School of Management found that data-driven organizations have a 5-6 percent higher output and productivity than less data-driven businesses1, and Nucleus Research found that analytics pays back $13.01 for every dollar spent2. To be certain, advanced analytics are a competitive advantage for commodity businesses.

1Erik Brynjolfsson, Lorin M. Hitt, and Heekyung Hellen Kim. Strength In Numbers: How Does Data-driven Decision-making Affect Firm Performance? MIT - Sloan School of Management. April 22, 2011.2Analytics Pays Back $13.01 for Every Dollar Spent. Nucleus Research. Sept. 17, 2014.

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Today, the organizations that stand to reap the most from this market volatility are using world-class analytics to lead to better:

Additionally, the volume of data in the world is growing at an unprecedented rate, but raw data alone is not enough for enhanced commodity management in today’s volatile market. The key to success lies in extracting knowledge from the data, which can be done with forward-compatible enterprise commodity management software and advanced analytics

Today, advanced analytics software is imperative for traders, risk managers, and quantitative analysts. That’s why Allegro Analytics covers thousands of different instruments and assets, giving customers the ability to model the breadth of their enterprise portfolios. In addition to a full suite of comprehensive analytic tools, Allegro Analytics boasts world-class analytical support provided by seasoned Ph.D. industry professionals.

PHYSICAL ASSET OPTIMIZATION

PORTFOLIO PRICING

OPTION VALUATION

DECISION SUPPORT

RISK MANAGEMENT

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of commodity businesses

believe advanced analytics are

key to future growth

94%

84%of commodity businesses

are planning to improve their

organizations’ analytics capabilities

within the next 3 years

— Allegro survey of 150 commodity executives


CLOUD-ENABLED COMMODITY MANAGEMENT SOFTWARE IS A COMPETITIVE ADVANTAGE

Increase Organizational Agility, Reduce Operational Friction, and Enhance Competitiveness on the Cloud

Today, organizations are turning to commodity management software that is fully enabled for the cloud, so they can get a lower cost of ownership through product families, agile infrastructure, and the smaller teams required for product support. With the cloud, organizations can get DevOps tools for management, promotion, automation, and disaster recovery, as well.

In today’s complex and volatile market, forward-looking commodity businesses are switching to the cloud for five distinct reasons:

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There’s only one next-generation commodity management and advanced analytics software that’s built for the cloud and offers position visibility, risk management, controls, and regulatory compliance — all on one platform.

And that software is Allegro.

INCREASED SPEED TO VALUE

Allegro Horizon is built for the cloud, which means customers can get a real

commodity management solution running and trading within weeks and

reduced time spent on upgrades.

DO MORE WITH LESS

Allegro’s enterprise-class application can be supported without significant

IT resources, so you can improve your resource allocation.

FOUNDATION FOR GROWTH

Add geographies, commodities, and desks without business disruption

or risk. Scale at peak demand times and reduce latency between

international offices.

A COMPLETE SOLUTION

Financial and physical management in a single solution for the front, middle, and back

office. Get a lower total cost of ownership by managing everything all in one place.


About Allegro Development Corp.

Allegro is the global leader in commodity management software and advanced

analytics for companies that buy, sell, produce, or consume commodities. For over

30 years, Allegro has delivered position visibility, risk management, comprehensive

controls, regulatory compliance, and analytics through a forward-compatible, next-

generation architecture that empowers commodity organizations to make data-driven

decisions. Allegro’s proven CTRM software innovation and flexibility, coupled with a

strong global network of industry partners and industry-leading analytics, makes its

solutions the best on the market for full commodity portfolio management.

The Next Generation of Commodity Management Software Is Waiting for YouWe’re Ready to Change Your Business

Stop relying on spreadsheets, your own homegrown software, or outdated CTRM

software for your commodity trading and risk management. In a volatile, complex, and

uncertain market, you need the global leader in commodity management software to

help you control how your business grows. There’s simply too much at stake to leave

to anyone else.

Headquartered in Dallas, Texas, Allegro has offices in Houston, Dubai, Jakarta, Singapore, London, and Zurich. To learn more, visit Allegro’s website at www.allegrodev.com.

30 YEARS IN BUSINESS

EMPLOYEES

USERS

CONTINENTS

CUSTOMERS

400

4000+

6

280

ALLEGRO BY THE NUMBERSTake a Look at Some of the Numbers We’re Proud of

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Overcoming a Volatile and Uncertain Market · 2020. 5. 19. · involving changes in capacity, cross...

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