Commodity logistics boosted by increasing digitisation
TXF: The Week That Was
Great strides are now being made in enhancing commodity logistics through the use of blockchain in commodity shipments. Jonathan Bell explores some of the recent developments.
Last week saw many of the great and good in the commodity world come together for Geneva Commodity Week. TXF held its own Commodity Conference there last Friday where a solid core of the community gathered to discuss current trends and business opportunities. A full report on these trends will be released by the end of this week in our key takeaways.
One of the key elements to emerge though was that of enhanced commodity logistics and how that is being improved through digitisation and the use of distributed ledger technology (DLT). Pie-in-the-sky? No, not at all, it is already happening and will continue to develop. As one presenter said: “the future is here!”.
But when will these proof of concept transactions become fully accepted systems? And, why does this matter at all? You probably all know – but just to reiterate some elementary basics, among many others: we need to try to eliminate discrepancies and human error; we need to improve transaction security; we need to try to prevent shipment delays and we need to speed up the documentation process overall. These moves to a more standardised approach will also enhance many parts of commodity trade financing, produce greater efficiency and transparency and ultimately make some of the logistics process cheaper.
To look at one element of digitisation development, last week also saw the completion of the latest pilot digitised commodity transaction where in this particular instance HSBC and BNP Paribas (BNPP) arranged what is claimed to be Singapore’s first fully digitised end-to-end letter of credit (LC) transaction between two different companies – Cargill and Rio Tinto. This was the latest in a series of pilots which are designed to take the digitisation of commodity trade finance a step closer to becoming a commercial reality.
The transaction involved Rio Tinto selling a bulk shipment of iron ore originating from Australia to China for its customer Cargill. As part of the transaction, BNPP issued an LC over the blockchain on behalf of Cargill to HSBC Singapore acting on behalf of Rio Tinto.
Both BNPP and HSBC enabled a seamless end-to-end transfer of electronic bills of lading (eBL) over traded goods using a digital LC for the first time in Singapore, by integrating the Voltron trade finance solution (through R3’s Corda blockchain platform in the back-end) with Bolero’s eBL system. Both BNPP and HSBC are members of the R3 consortium.
“The future of trade finance is digital and paperless,” said Zoran Lozevski, head of global trade solutions, Asia-Pacific at BNPP. “Blockchain technology is an important pillar in our innovation agenda and we believe that transactions like this one will help achieve greater efficiency and transparency in trade finance for the benefit of all players in this space.”
From the clients’ side, Rio Tinto’s head of commercial treasury, Abel Martins-Alexandre said: “Blockchain offers efficiencies and greater transparency, while also creating a viable new offering to our customers and stakeholders along the supply chain.”
While Lee Kirk, MD for Cargill’s metals business, commented: ““As the first fully-digitised iron ore transaction in Singapore, this marks a positive and exciting new development for the ferrous industry. What was previously a complex process is now accessible via a more modern, digitally-based approach and a secure platform. We are transforming our supply chains with digital technologies like blockchain in trade finance, commodity trade operations and traceable food programmes to better serve our customers across the globe.”
Of particular importance in this process, in this transaction the LC issuance was completed in less than two hours compared with several days for traditional, paper-based LCs. In addition, the faster documentation turnaround for each shipment can potentially lead to increased flexibility in liquidity management resulting in working capital optimisation.
At HSBC, Ajay Sharma, regional head of global trade and receivables finance, Asia-Pacific, remarked: “The transaction represents a significant advancement of this solution since our first transaction earlier this year, which further validates its commercial and operational viability to establish a new era of digital trade. Together with banks and the trade finance industry we will continue to improve this solution by adding new features and functionality as we move towards a commercial launch.”
In Geneva, an HSBC banker informed TXF that the full commercial launch could take place towards the end of next year. The pilots will continue to test various functionalities within the system until then.
The first commodity trade pilot done using blockchain took place in May of this year – and again involved Cargill through its Argentinian entity, but this time with a shipment of Argentinian soybeans going to Cargill Malaysia.
HSBC and ING Bank facilitated the transaction. This transaction was carried out using LCs within R3’s blockchain platform Corda. The technology allowed the transaction to be made on one central platform and minimised the time and paper trail needed to make the trade.
Then in October this year another pilot took place – this time involving a shipment of polymers from Reliance Industries in India to Tricon Energy in the US. The LC was issued by ING Bank for Tricon Energy USA, with HSBC India as the advising and negotiating bank for the exporter Reliance Industries.
That transaction was an industry first as the blockchain platform integrated with Bolero’s electronic eBL platform to issue and manage an electronic bill of lading. This allowed a digital transfer of the title of goods from the seller to the buyer in the underlying trade. It further enabled the underlying trade to be fully digitised. The end-to-end transaction was executed on R3’s Corda blockchain platform.
Commenting on this transaction, Srikanth Venkatachari, joint chief financial officer, Reliance Industries said: “The use of blockchain offers significant potential to reduce the timelines involved in exchange of export documentation from 7 to 10 days to less than a day. When adopted at scale, it helps in significant optimisation of working capital. Further, use of blockchain in trade finance enhances transparency, security and synergy across all the parties and stakeholders involved.”
The developments that have taken place so far are quite monumental for trade and commodity shipments. However, there remain significant hurdles for blockchain before it becomes an efficient and legally compliant technology that can be applied globally within trade and commodity finance. All these are being tackled.
R3, HSBC, ING, the other six founding banks supporting the Corda application (Bangkok Bank, BNP Paribas, CTBC Holding, NatWest, SEB and Standard Chartered) are seeking to expand the network on an open source basis to drive adoption across the industry. This includes technology partners that can provide banks and customers tool kits for easier onboarding, ecosystem participants, besides buyers/sellers and their banks. Development has so far been fairly rapid, and we can seriously expect continued progress as these institutions look to take this system forward.
Runaway train in Oz brings us back to earth
But, to throw a little spanner into all of this we obviously need to realise that not everything goes to plan and like anything the global supply of commodities is prone to extremes such as natural disasters and major accidents which occur when transport is involved. The very recent case of a BHP-owned train carrying iron ore which was derailed in Western Australia is one such extreme example.
On 5 November a BHP goods train with 268 wagons stretching almost 3 kilometres in length and carrying 35,000 tonnes of iron ore worth around $2 million was derailed en route to Port Hedland in Western Australia. Considerable damage was done to many wagons and of course rail track.
The accident happened as the driver alighted to inspect an issue with a wagon, and apparently the train moved off without him! Strewth, Blue! Automatic safeguards failed to kick-in, and the train travelled for a further 92 km before being deliberately derailed in order to stop it! It was a necessary step in order to avoid a catastrophe.
Ok – so BHP does keep big stockpiles of iron ore at Port Hedland, so shipments to customers were able to continue. But, according to industry analysts, the loss of a full week’s wort of iron ore shipment could have cost the company around $190 million.
Getting things back up and running is obviously of paramount importance. In true grit style (excuse the pun) BHP reported on Monday this week that it had cleared the derailment and that the company had resumed rail operations between its Pilbara iron ore mines and Port Hedland. Well done BHP!
For all you metal heads out there, Port Hedland is the world’s largest iron ore export port with a total annual throughput of 519 million metric tons in 2017/2018, according to Pilbara Ports Authority. As well as BHP, it’s used by miners including Fortescue Metals Group and Roy Hill Holdings. BHP shipped a total of 275 million tons in fiscal 2018.
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