I just posted a Reuters story regarding Kobe Steel. At first sight, this is a story of mismanagement, lack of corporate discipline and profits at any cost – in a way similar to the VW scandal regarding CO2 emissions reporting. The impact is obvious – Kobe Steel stock is in free fall and its brand equity damaged to a serious degree. However, for commodities traders there is a deeper meaning to the developing scandal around traceability and trust.
Trust is a key component in commodity markets. Banks lend money, buyers buy and so on based on trust that tests and standards are met and that the data is accurate. When trust is broken or corrupted, serious issues emerge for everyone in the industry. Verification requires traceability. Not just the ability to trace something back through the supply chain but to identify the checks and balances along the supply chain. Recent scandals involving warehoused metals and duplicated warehouse certificates to pledge metal as collateral for multiple bank loans, hitting companies ranging from Citic to Standard Chartered, are still fresh in the memory too.
It is difficult to stop deliberate fraud but a proper and verifiable approach to traceability and methods to guarantee validity of documentation are part of the solution. The LME launched LMEshield, which provides electronic receipts as proof of ownership for metal stored outside the LME’s own network of registered warehouses as a potential solution to the metals in storage issue, for example.
From a CTRM and CM software standpoint, being able to store traceability data and documentation is a key aspect to supporting what has to be a systematic approach to fraud avoidance at commodity businesses. Traceability is a key aspect of today’s business requirements for CM and CTRM software where there is a long and complex supply chain. Increasingly, we expect traceability functionality to be a key buying criteria in metals and ags and softs. Scandals like Kobe Steel more or less guarantee this.