An eerie calm? The view from Commodity Trading Week 2024

Never let it be said that there is a dull moment in commodity trading. Even today, as the industry navigates a period of extended calm, cautious optimism is tempered by geopolitical risk and supply chain issues. Is the commodities business over the worst of the volatility that has characterised recent years or is it at the precipice of a new set of crises?

This was the question at the centre of the 2024 edition of Commodity Trading Week - hosted last week at Chelsea Football Club's Stamford Bridge stadium in London. One panellist summed up the mood early on: “It’s eerily calm”. Inflation is no longer rampant in the developed world, conflict in the Middle East is yet to spark a damaging surge in oil prices and commodities growth has been stable in tandem with a strong US dollar.

By and large, markets are stronger than expected – with some notable exceptions in the soft commodities business, where long-term underinvestment is now drastically impacting cocoa supplies.

Reduced volatility is always a mixed blessing in commodities. Traders thrive on instability, and tranquil market conditions will inevitably reduce margins across the board.

However, potential pitfalls are littered across the coming months. Geopolitical risk is the headliner. Unsurprisingly, this issue topped a poll of attendees asking them for their biggest concerns for the rest of 2024. Elections could prove disruptive, with more than half of the world’s population voting across the year. The US Presidential race will be tumultuous – electric vehicle policies, relations with China and approaches to tension in the Middle East will all be on the table.

Conditions in key commodities like copper are already tight and the market is beginning to price in anticipated shortfalls in supply. Nickel producers are facing a squeeze from Indonesian supply that could prove to be terminal for much of the industry. New sanctions on Russian metal have created further confusion for exchanges. The metals markets more generally appear to be suffering from a crisis of confidence – not enough investors are yet willing to take a piece of anticipated long-term demand for battery minerals.

The event itself was geared towards the practical and technical concerns of commodity trading. Paperless trade, shipping developments, power purchases, procurements and counterparty risk all featured on the agenda.

A focus on market fundamentals was welcomed by the audience after a period of volatility in which commodity derivatives and financing have often dominated the conversation. As one panellist commented, the disconnect between pricing and actual supply-demand dynamics is often attributable to the speculative positions that traders can take up. The LME’s nickel crisis of March 2022, in which a sudden and aggressive surge in prices was triggered by a single company’s short position, is just one such example.

In this context it was positive to see an entire content stream dedicated to shipping and maritime.

Shipping has always been an essential facet of international trade, but its role truly entered the spotlight during the COVID-19 pandemic. The term ‘supply chain disruption’ has become an easy shorthand for a host of difficulties that emerged in producing and transporting goods in the wake of lockdowns.

Shipping was at the centre of the maelstrom, and in the years since the world’s dependence on sea travel has only grown. Demand for LNG has supercharged orders for gas carriers from the world’s shipyards. Across the shipping industry earnings have risen off the back of increased demand for goods and a limited fleet of vessels.

In 2024 congestion and canal disruption top the list of concerns. This is partly associated with geopolitical tension. The Red Sea is no longer a safe passage for ships in light of attacks by Houthi rebels in Yemen and the Iran-controlled Straits of Hormuz would also shut down in the event of widespread conflict in the Middle East – at present around one in every five oil tankers passes through the Straits.

Low water levels at the Panama Canal have also been widely documented – a sign of the climate-induced trade disruption that could become the norm in future. Waiting times to access the Canal were described by one attendee as ‘indefinite’. At the end of 2023 the Canal authorities held the first auction for vessels as a means of resolving some of the tensions that have arisen over priorities for transit.

Debates around shipping often go hand-in-hand with digitalisation. The promise of truly paperless trade grounded on blockchain technology is yet to achieve mass market appeal, but the rigours of COVID-19 and geopolitical crisis have prompted many to look again at technological solutions to fraud and compliance risk.

TXF spoke to Chris Sunderman, Program Lead Banks at the Digital Container Shipping Association (DCSA) on the sidelines of the event. “The fact that a very traditional industry like commodity trading is talking about transformation is really a good step forward. But I will add that the parties involved still have a big question mark around the execution of (digitalisation)… What we've seen in the past is that the proposed new tech digital solutions offered to the trade industry did not solve issues in the full supply chain. They were mainly focused on one or two steps in a process, bringing limited operational efficiency, not solving the pains in the chain."

One striking feature of the event was the number of digital trading solutions providers setting out their offering. It is a strong sign of the interest that the commodities business is generating, but it is also a reminder of the stratification that still exists. Traders and banks are often siloed by an unwillingness to share technology platforms with rivals – the antithesis of the blockchain technology that underpins many digital solutions.

The UK Electronic Trade Documents Act was a step forwards in this space last year. Legislation can help set out the path, but according to Chris Sunderman, it is not the biggest obstacle to progress.

“What we do at the DCSA is develop standards that ease the road to digitalisation, helping supply chains in their digitalisation journey. In practice, the electronic bill of lading (eBL) is already possible. The fact is that not all transaction parties are able to transmit/receive an eBL, because they don't have a solution provider that provides the technology to receive that eBL and connect their operations, compliance, collateral management and so on, which especially for banks is critical.”

In this sense the issue with digitalisation is not legislative, but rather one of adaptation. Few companies have been able to secure buy-in from all their shareholders for significant investments in technology upgrades, particularly if their clients and partners refuse to do the same. The DCSA is leading a push by shipping CEOs to achieve 100% eBL adoption in the containers business by 2030, but at present this kind of collaboration is the outlier rather than the rule.

“I can tell you the pace of change can be really fast. Many African countries, missing the legacy of outdated technology and having the advantage of a young population, are keen to go digital and within a couple of years they are ahead of the market. They're not there yet, not at all, but they could benefit from that and be an example for other parts of the world.”