The global pandemic and resulting disruption to global trade have savaged the demand and supply equation of the commodities business. Success for these companies in the post-COVID era depends on finding ways to increase their operational resiliency. To achieve this goal, we recommend a three-pronged strategy.
Across the value chain, the pandemic exposed fault lines that led to failures in coordination, safety and customer engagement. A lack of resiliency is compelling commodities companies to prioritize business viability over short-term economic gains. Evolving regulatory pressure and cyber risks have added pressure to companies’ day-to-day operations.
This has forced many businesses to embrace remote work as most business interactions and transactions went fully online amid pandemic concerns. Running operations with employees working remotely made seamless communication and collaboration difficult — and hampered the pace of decision-making.
The massive shift to remote work, moreover, has opened cyber threats for companies. As a result, data privacy and compliance emerged as key issues for players up and down the commodities value chain. Remote work settings could also breed insider trading risks since many of these vulnerabilities have yet to be addressed.
Falling demand and prices, disrupted supply chains and remote work shifts are creating operational havoc. For example:
Despite these challenges, commodities trading organizations can sustain and create new growth avenues by leveraging advanced technology, improved crisis management strategies and embracing new ways of working. To navigate the current crisis — and beyond — we suggest the following:
To cope with pandemic-induced market volatility, commodity companies would do well to drive realistic valuation and informed market risk management via a thorough review of market liquidity and independent price verifications and determining forward curve values. As demand across all commodities improves throughout the second half of 2020, players should remain cautious and prepare for volatility as liquidity-induced recovery might not prove sustainable until organizations start showing recovery in their earnings backed by growth. However, the upcoming U.S. presidential elections in and rising U.S./China trade tensions could exacerbate ongoing economic uncertainty.
Challenges to trading systems posed by remote working can be effectively addressed by embracing trade analytics powered by ML algorithms. Such algorithms can detect anomalies and help traders to have an accurate read of the markets and optimize strategies to manage market shifts. Stress-testing scenarios may be made comprehensive by using market data collected during this pandemic to strengthen trading strategies, workflows and pricing engines.
Adopting distributed ledger technologies, blockchain-based trade finance solutions can drive enhanced trust and business continuity through electronic documentation.
By leveraging virtual reality technology, companies can create 24x7 connected virtual command centers to strengthen their 360-degree ecosystem views that aid in real-time decision-making. On the people front, companies have to identify critical incident management roles and their specialized training needs considering physical and virtual operating environments. Business continuity procedures (BCP) need to be enhanced to deal with events like mass sick leaves, travel restrictions and large-scale remote work shifts. To further strengthen structured approaches to crisis management, data points gathered during the pandemic can be used by companies to enhance stress testing scenarios of the business model and to improvise their crisis management playbook that can make them more resilient for future crises, if they occur.
On the technology front, initiatives to build resilience should begin by leveraging new data points and rebuild technology models to steer operational decisions. For example, companies usually have visibility of their direct suppliers but none whatsoever for the next level suppliers which are used by this primary supplier. Companies can build new multi-tier dashboards, which give them better access and control over their supplier network. Further, web enablement of core applications, mobile adoption for core processes and cloud strategy for key applications would go a long way in paving the way for resilience. Digital twin technology can be deployed to create digital portrait of the end-to-end supply chain to explore dynamic sourcing options, assess risks, enable real time monitoring and improve process efficiencies.
The shift to remote work is unleashing the phenomenon we term Remotopia, compelling organizations to play catchup in a new business reality. Companies need to ramp up infrastructure by leveraging infrastructure as a service (IaaS) and software as a service (SaaS) models for ensuring seamless bandwidth for critical systems. Transition to the new paradigm should also be accompanied by new people measures designed to reflect the changed work environment of Remotopia. These include ensuring transparency in working hours, better work-life balance and revised policies for medical, appraisals and leaves.
Management also needs to ensure that teams thrive (rather than merely survive) in the new environment. In order to enhance employee skill sets, companies need to create competency development programs in the areas of their work/interest. Also, companies need to explore advanced digital technologies for enabling bigger events such as town halls, exhibitions, congresses, etc., to boost collaboration among employees.
Increased risk of fraud must be dealt with by reinventing operational processes with a healthy dose of awareness. Companies should assess privacy and mitigate insider fraud risk on roles and processes under remote work to better target newly emerging insider/personally identifiable information (PII) risk. Policies and procedures may be realigned to accommodate COVID impacts (e.g., data access/security considerations for remote work, new threat investigation policies, insider trading). Such processes may be further aided by masking data to protect confidential information while loading it into non-production environments.
The global pandemic has unleashed unprecedented disruption across all segments of the commodities markets — oil and natural gas, mining and metals — adversely affecting demand and creating price volatility.
For the first time, oil markets experienced negative derivative prices and a huge fall in demand is on the cards for 2020. Commodity prices are forecast to fall by 10% to 15% in 2020. Meanwhile the mining industry is expected to lose around $200 billion in its 2020 earnings, and 419 oil and gas companies have filed for bankruptcy in the U.S. Across the commodities spectrum, suspension of production and operations, job cuts, huge loss in incomes and bankruptcies are being witnessed.
This article was written by Vinod Malpani, Tejas Shah and Bakul Bharadwaj, Director, Consulting Manager and Senior Consultant, respectively, within Cognizant’s Banking and Financial Services’ Capital Markets Practice.