Value Study: Investing in E/CTRM in Turbulent Times
The only constant is change echoes an astute observation by the Greek philosopher, Heraclitus, some 2,500 years ago. Those of us who are engaged in the world of commodities are continually reminded of the accuracy of his observation, particularly recently, as commodity prices collapsed led by crude oil. In fact, our industry is continually impacted by changes in the regulatory environment, supply/demand balance, global economic environment, technology developments, political intervention and more.
Recently, BP noted in its annual Energy Outlook1, “Today’s turbulence is a return to business-as-usual. Continuous change is the norm in our industry. The energy mix changes. The balance of demand shifts. New sources of energy emerge, such as shale gas, tight oil, ultra-deepwater oil or renewables. Economies expand and contract. Energy production and consumption are affected by disruptions, from wars to extreme weather. New policies are created to address climate change or bolster energy security.“
Change is the very lifeblood of the commodity trading world, creating opportunities for profit for those who are swift and responsive enough to act. Good traders make money in up or downwards moving markets, provided they are armed with up-to-the-minute data and the analytical tools needed to identify, analyze and manage their trading decisions. However, depending on market direction, other market participants might be caught in a more problematic situation and experience cash flow and/or profitability issues should price movements undermine their naturally long (producers) or short (consumers) positions. Nonetheless, if the company has the right tools at its disposal to track up-to-the-minute changes, and properly and effectively manage its exposure to those changes, then value can be protected and in some situations, profits might be made.
Managing Forward Curves in a Complex Market
Any company that owns commodities, either through production or merchant activities, needs to know not only the current value of those commodities based on market prices, but also needs to develop a view of the future value of those commodities during the time that they are projected to be held in inventory. Additionally, agreements to purchase commodities in the future must be accounted for, not only at their agreed or projected purchase price, but also during their anticipated holding period.
Commodity prices are constantly changing and are driven by market forces that are virtually impossible to predict with any degree of certainty. As such, accurately forecasting costs and price exposures is difficult at best, and particularly so now, given the rapidly changing supply and demand patterns that define the global commodity complex. Huge growth in demand for all commodities in Asia, the rapid rise of agricultural exports from developing countries in the Asia-Pac region, and the shale revolution that is driving unprecedented growth in US oil production, are all examples of the new dynamics that have fundamentally altered price formation in markets around the world. In this globalized and increasingly interconnected market-place, which is being constantly buffeted by economic uncertainty, predicting future prices is more difficult, but perhaps more important, than ever.
The Use of Spreadsheets in Commodity Trading – 2015
Spreadsheets have long been an integral part of a trading company’s armory of tools and software. Over the years, the demise of the spreadsheet in commod- ity trading organizations has continued to be predict- ed with increasing frequency and regularity, and yet, the spreadsheet is alive, well, and kicking in 2015; as this survey proves. Despite the growing maturity of commercially available Commodity Trading and Risk Management software (CTRM) solutions, the increase in regulation and oversight and, the alarm- ing number of horror stories involving spreadsheets in losses, mistakes and fraud, they seem difficult to eliminate. This survey, prompted by current round of regulation and controls, revisits the spreadsheet in commodity trading to discover how widespread and pervasive they are and why.
The survey was conducted as an electronic questionnaire promoted via Commodity Technology newsletter and other email lists as well as on social media and the CTRMCenter website. It received 133 responses between early November and mid-December, 2014, which after eliminating incomplete responses or those submitted anonymously, was reduced to a set of 50 valid responses from identifiable participants. The distribution of the valid responses was primarily from Europe and North America and from across the entire commodity trading sector.
Allegro CTRM Value Study Report 2014
The environment of physical energy and non-energy commodity trading and marketing has grown increasingly complex, marked by globalization bringing about rapid changes in supply and demand patterns, increased regulatory scrutiny and evolving trading and reporting rules, volatility along the entirety of the physical supply chain, and increasing uncertainty as to future price movements. In order to react to these changes quickly and appropriately, participants in these markets must increasingly rely on a sophisticated infrastructure of software and technologies to ensure a complete view of their trading positions and external market conditions that can quickly and severely impact their values. The core component of these now requisite trading and marketing technologies are energy and commodity trading and risk management (CTRM) systems.
As market complexity has increased and multi-commodity trading has become more common, CTRM solutions have had to become more sophisticated and provide a greater depth of capability in order to capture and value the unique characteristics of the multitude of physical commodities being transacted along the physical supply chain, from source to market. Given the capabilities of these CTRM systems, they do represent a significant investment for any trading or marketing organization, generally trailing only the large scale ERP solutions, like SAP, in terms of costs to purchase and implement.
Allegro Development, one of the world’s largest CTRM solutions providers, engaged Commodity Technology Advisory to conduct a survey of a number of their clients to determine their views as to the value of their investment and the operational and financial impacts of deploying Allegro’s CTRM solution.
This report summarizes the results of that survey and discusses the key considerations for any company seeking to develop their own assessment of the value of their CTRM technology investment via a Return on Investment (ROI) calculation.