The need for unquestioned inventory transparency and reconciliation in commodities has never been greater.
The “flight to quality” by trade and commodities finance banks has been a much-discussed feature of the last two years. 2022 has brought a different kind of strife to the commodities business in the form of fluctuating prices, margin calls and supply chain disruptions, with liquidity worries spreading even to large traders. In this Industry Perspective, Rod Hutchinson and Damir Hasagic, respectively Americas business development manager and chief revenue officer at Veridapt, an industrial internet of things (IoT) provider, say that independent and digitised real-time monitoring of commodity inventories can improve financing structures and unlock liquidity in times when credit is tight.
GTR: Some commodities traders have struggled to gain financing in recent years and fluctuations in global commodities markets mean liquidity has been tight in some sectors – what solutions could companies employ to help resolve those challenges?
Hutchinson: There has definitely been a flight to quality in terms of liquidity, as banks chase better credits, better structures, and the like. That leaves smaller and even mid-tier players in a tough spot. This year has also been challenging for some of the big players. We’ve seen a lot of volatility, high prices and some massive margin calls, straining liquidity.
So then the question is, what technologies can help overcome some of those liquidity challenges? In fintech, there are a number of technologies that have come to the market that provide working capital relief, for example through discounting receivables, or even payables programmes, which increasingly are being provided by fintech platforms.
Another area, which Veridapt is very focused, is financing structures, and how they can be strengthened to make banks more open to extending finance. That stronger structure partly comes from monitoring of the collateral, or the commodities, that you may own. Importantly, it’s also about real-time data instead of the usual way of doing things, where a financier is presented with data that can be weeks or even months old.
Coupled with those aspects is the importance of having an independent source of monitoring data, instead of only having access to information provided by the bank’s client. Combined, these improvements can bring additional liquidity to certain transactions.
GTR: Why do you think sectors like agriculture need better inventory monitoring?
Hasagic: Supply chains for agricultural commodities have been adapting to technology slower than the energy sector. This is most likely because of the lower costs of the inventory per cubic metre of volume of agricultural commodities. Therefore, our solutions need to match these lower price points to ensure we provide value to the market. We expect that to be the dynamic in this sector.
Here again, financiers, traders, logistics companies – as well as farmers and producers themselves – are looking for solutions. The agricultural sector also has a unique concern for the quality of the inventory. Our solutions need to expand to include items such as grain temperature, humidity and CO2 level reporting as standard.
Equally, because of the geographical difficulties and other issues during harvests, reconciliation of inventory, even on a single site, is another big challenge. Volumetric measurements taken from silos, stockpiles and sheds need to be converted into tonnage and reconciled against the records taken by weighing the trucks over the weigh bridges in and out of sites after adjusting the variation of grain humidity along that process.
The challenge is to apply instruments to these challenges correctly, without spending too much money. We are currently running trials for a major grain logistics company in Australia as well as for a similar operator in South America, which is linked to a financier. We’re hoping to bring the solution to the market within the next two to three months.
GTR: How important is it for IoT inventory monitoring solutions to be able to withstand extreme weather?
Hasagic: When you’re dealing with physical commodities, these are often produced or extracted from far-flung places and subject to all kinds of wild weather. It is very tricky for banks or others playing a role in financing those commodities to monitor inventories adequately and regularly without help. Often traditional collateral management services are unable to inspect frequently or even gain access.
For example, when we started back in 2005, we had to design and build hardware that could handle the extreme heat in Outback Australia where our customer, BHP, operated. But extreme cold weather is another factor. We also had a project at a gold mine inside the Arctic Circle in Canada, to install and commission a level-gauging system on six tanks which held a year’s supply of diesel for the mine’s operation. There are about two weeks in summer in which the waterways are not iced over and the temperatures go down to around -15°C.
Controls and instrumentation were designed for these conditions and are still in operation today, five years on. The client in that case was a bank, who structured a repo deal with the customer to take all the complete inventory and then sell it down to the customer over that year. Our application was used to reconcile these volumes and approve the bills between the two parties. We had a critical role as an administrator of this contract. Not only the inventory tracking application, but an invoice administration role as well.
GTR: Veridapt has a wide customer base from producers to traders to financiers; how is your equipment deployed?
Hasagic: Our hardware components have been optimised over 17 years, including in the demanding mining sector. This is the key to rapid deployment. A typical installation will start with a design review of the site, which establishes the instrumentation and control devices we need for the optimal outcome. We then procure hardware and ship it to that location. It is either installed by the local contractor, who is hired by us, or by the customer. It’s a short and painless process – after calibration, the system is ready to go. We call it ‘plug and play’. Our customers tell us the beauty is in the simplicity. We’re very proud of that.
The post Industry Perspectives: Digitised inventory monitoring the key to unlocking liquidity appeared first on Global Trade Review (GTR).