If you work in a firm that deals with the international trade of commodities and you have not yet heard of commodity trading and risk management (CTRM) systems, it’s about time you did.
Perhaps a decade or so ago, the use of IT in managing trading and risk exposures by commodity trading houses was limited to email and spreadsheets. Contracts were recorded by hand in trade journals, and shipments were managed through cumbersome contract files filled with trade documentation.
It was around this time that JustCommodity Software Solutions was established to comprehensively address the needs of commodity trading houses. The Singapore-based technology company developed a proprietary software solution originally intended for the edible oils market. The company’s current portfolio of customers reflects these origins – around 80 percent are involved in edible oil trading in Asia – but it has diversified and supports companies operating in many other commodities.
The company has seen stellar growth since 2008, achieving a compounded annual growth rate of 131.63 percent, as verified by the information and credit bureau DP Information Group. As the company grew, its product evolved into a flexible and user-friendly system which is able to support the trading of multiple commodities across various commodity exchanges.
Just like a living organism, the collective wisdom of more than 10 years of software development in consultation with industry leaders has allowed the best trade practices to be incorporated into the system.
Traditionally, the use of advanced software to manage trades has been the domain of large trading companies, which have the spending power and need to purchase such systems in order to manage their risk exposures – particularly in the energy market. Since the commodities boom in the last decade up to 2010, as emerging markets began demanding more raw materials, the rise in prices highlighted the need to better manage risk exposures.
Market size and demand
A market-sizing study, conducted by industry research firm CommodityPoint, estimates the total addressable market for CTRM software globally in 2011 is $452m, and that some $321m may be spent on the procurement of commercially available CTRM software this year. This represents robust overall growth (of 11 percent) over its estimate of $290m spent in 2010 on the procurement of commercially available CTRM software.
There is a technology gap between regions, with the Asian soft commodity sector – which is comprised mostly of family-run businesses – notably behind. However, a contributing factor to growth in the region is that control of business is being handed down to the younger, more technology-savvy generation of businesspeople. Other factors that dampened the demand in Asia include the relative strength of the US dollar (and the euro) to most Asian currencies – most proposals are quoted in either US dollars or euros – and the relatively stable commodity prices of yesteryear.
Also, as the commodities sector becomes more and more lucrative, there has been a growing trend for corporate institutions to diversify into commodity markets by buying up plantation space. As investors, these corporations will search for a measure of control, protection and visibility for their investments. Korean conglomerates like LG and Samsung Group, for example, have reportedly purchased palm oil plantations in Indonesia and Africa to support biofuel production.
Advancing in technology
As a web-based application, JustCommodity’s ContraXcentral is ideal for monitoring trade positions anywhere around the world. The system provides a secure, password-protected login which can be accessed through a VPN connection, providing decision-makers with access to live, up-to-date information at any time.
JustCommodity has a tradition of innovation and excellence. It incorporated a direct electronic reporting mechanism for its Malaysian clients to the Malaysian Palm Oil Board, the government body that collates economic statistics and deals with the overall regulation of the Malaysian palm oil industry. The benefit from this single reporting enhancement was immediately evident, as the time needed to produce this report was reduced from two onerous days to mere seconds.
While most CTRM systems offer some general ledger and accounting capabilities, the accounting function is typically handled by an accounting system through integration between the software suites. The understanding is that traditional enterprise resource planning (ERP) solutions are not intrinsically built to handle the nuances and complications of managing a large volume of physical and futures trades. Both specialised systems working in harmony ensures the best results: there is no sense in reinventing the wheel. What the finance users of a company can expect is the accuracy of data being communicated between systems, as well as the easily tracked audit trail recorded by the CTRM system.
This is where the software specialisation and expertise of CTRM vendors fits in to the organisation’s technology landscape. The various operational processes, trade documentation, reporting structures and security levels can gradually be developed by an ERP vendor. However, without the domain knowledge of trading and risk management, this is akin to constructing a house of cards. While handcuffed. In the dark. The man-hours and financial costs involved in documenting and building such customisations to a traditional ERP system are herculean.
Engaging external consultants, who may have the technical know-how to work on these projects, comes at a high price. Some companies that have embarked on internal CTRM projects have been in development for more than 48 months without a usable product in sight. Internally developed software suites, which JustCommodity consultants have seen and consistently replaced, are often lacking in features or flexibility which are easily met by its standard software package.
JustCommodity has worked closely with its clients, consulting on business process improvement, technology infrastructure and system integration. Just as each business faces its own unique set of challenges and customer requirements are constantly evolving, the software specialist provides a flexible platform that is scalable and grows with the needs of its users. After all, in the complex world of commodity trading, technology should be there to make commodity trading simple.
