Cutting Trade Costs Across The Commodity Value Chain
Digitising post-trade processes for commodities could cut costs by up to 40% across operations, accounting, settlements and IT, according to blockchain developers.
Modern commodity trading still relies heavily on manual, cross-checked, paper-based administrative tasks to process individual trades through to settlement and delivery, but that looks set to change with the advent of new IT options, including (but by no means limited to) distributed ledger technologies like blockchain.
“The question of whether blockchain will change the way we do business is already answered for BP,” Iain Lawson, BP’s head of structured products for the Eastern Hemisphere, said at the S&P Global Platts Digital Commodities Summit in Singapore in July 2018.
There are already blockchain-based platforms for post-trade processing being developed and road-tested across the Crude Oil sector that is intended to eliminate paper, improve efficiency and transform trade finance options.
The first challenge is to prove that these platforms can perform at an enterprise-grade and then be put into full operational use.
Others are developing & testing post-trade reconciliation services for natural gas, using blockchain technology, where it is projected that the service could cut back-office costs for processing wholesale gas trades by 30-40%.
It is believed there could be even greater cost savings, given the reduction in technical infrastructure that’s required to build and support a blockchain application.
These types of services are aiming to enable companies to deal with mismatched trades more efficiently. A trade reconciliation blockchain application could streamline this type of process by raising disputed trades at the outset and therefore save a huge amount of time, enabling faster payment and settlement times, larger trading volumes and an unalterable audit trail.
Blockchain also potentially reduces reliance on backup servers and IT hardware and provides greater protection against cyber threats. These blockchain platforms are designed to allow any application using it to scale to enterprise requirements.
However, since 2018, most of these trade processing services are still in the design, development & testing phases with the initial partner companies that have come on board. At the moment it is difficult to see blockchain initiatives gaining commercial traction until the proof is there for all to see.
Meanwhile, Artificial Intelligence and Machine Learning are on the rise. We will take a closer look at these in future posts.