With J.P. Morgan’s recent $2 billion loss, financial risk is once again making headlines. It doesn’t look like this loss is going to cause systemic failure, but it serves as a prudent reminder that strong credit risk management systems and   practices are vital to surviving today’s risky waters.   

 In a recent article in We Know Commodities, Dana Docherty and Amanda Lohec, Directors at Opportune, warn that “All too often, spreadsheets that are intended to be a stopgap measure become comfortable and are accepted as a long-term solution. Replacing those spreadsheets with Credit Management and Reporting (CMR) systems is critical to developing strong credit risk management capabilities."  In the article, they also share some important lessons learned from credit risk and reporting system implementations.  The following are some lessons learned to ease the transition:

A combination of persistently low margins and high volatility can spell bad news for refining operations, causing intraday swings in oil prices exceeding their margins. According to an article recently published in Global Technology Forum, this situation is driving greater integration between refinery operations and trading activities within oil companies. It’s no longer good enough to be buying or selling to meet the needs of the refinery – supply traders and marketing personnel are being asked to use their market knowledge to make smarter trading decisions.

According to Viren Doshi, senior vice president, Booz & Co., a more trading-oriented approach has been most prevalent in northwest Europe, the Mediterranean, and the US Gulf Coast. Companies in these regions have recently had to be more flexible to survive low margins and leverage high price volatility in their markets. Independent refineries in particular have been bullish on this approach because of their less complex operations.

Software solutions that can minimize costs and maximize refinery margins by optimizing the entire supply and trading chain have been key to making trading integration easier for refiners. These solutions have the ability to process refinery plans and forecast demand and production information upon which the supply and marketing groups can take action. They also enable plan changes to be immediately visible to the trading group for improved efficiency and productivity. To learn more, read the full article.

Are you in full compliance with AMIRA P754? The importance of coherent material balance results has long been recognized by mining and metallurgical companies. Due to recent accounting scandals and the resulting tightening corporate governance, companies are becoming increasingly concerned with how the reported numbers are obtained and how much accuracy can be attributed to them.

As a result, The AMIRA P754 project was launched in 2004 to develop a rigorous set of metal accounting guidelines for the mining and metallurgical industres. The guidelines stress the importance of state-of-the-art metal accounting systems, such as Algosys Metallurgical Accountant™, and warn that companies using spreadsheets for metallurgical accounting lack auditability and data accuracy and are not in compliance with AMIRA P754.

The Canadian Institute of Mining, Metallurgy and Petroleum (CIM) recently published an article on Implementing the Ten Best Practices of Metal Accounting at the Strathcona Mill.  It is an excellent case study on how Algosys Metallurgical Accountant helped Xstrata meet all AMIRA P754 guidelines – including the ten principles of best metallurgical accounting practices (BMAP).  It also explains how Xstrata was able to eliminate spreadsheets, gain visibility into key plant performance indicators, and optimize performance and recovery.

You can read the full article here. I hope it provides some valuable insight into AMIRA P754 and fresh ideas on how to automate, standardize, and accelerate your metallurgical accounting cycle.

Mining companies are no strangers to advanced technology – geological models, dispatch, and plant control systems offer sophisticated databases and solutions for asset optimization. But there’s one exception: supply chain management for tracking assets from mine to customer.

Mining companies often rely on a patchwork of generic spreadsheets to manage the tonnage, quality, and value of their coal or mineral supply chains. This is a very dangerous practice – spreadsheets are not sophisticated enough for handling complex operational processes such as planning, material tracking, and grade control – however, they are often relied upon to do just that.

In addition, studies show that as many as 94% of spreadsheets contain errors, which often go undetected. These errors can spread throughout key corporate processes that control hundreds of millions of dollars of inventory, putting the entire firm at significant operational risk.

To learn more, read “The Hidden Threat,” an article recently published in Mining Magazine. Authored by Steve Maxwell, Triple Point’s resident mining supply chain expert, the piece details the dangers of relying on spreadsheets for mining supply chain management, making the case for advanced supply chain management systems. Read it now.

According to McKinsey, Asia’s global middle class is likely to grow by three billion people over the next 20 years, and China and India are doubling per capita incomes by approximately 10 times the rate and 200 times the scale achieved by England’s Industrial Revolution in the 1800s.

This massive middle class expansion has fueled demand for commodities such as oil, coal, and wheat. More and more Commodity Management companies dealing in the Asia Pacific (APAC) region are realizing that in order to ensure price volatility doesn’t diminish profitability, they need advanced technology solutions such as Triple Point’s Commodity XL™ to optimize supply chains, improve decision-making, and minimize risk.
 
In 2011 Triple Point experienced record growth in APAC, with year-over-year revenue for the region increasing 75%. APAC customers include China National Offshore Oil Corporation (CNOOC) Limited, China’s largest producer of offshore crude oil and natural gas, as well as Bayin Resources, Dhanlaxmi Bank, Marubeni, Merit Chartering, and State Bank of India. Triple Point has also significantly expanded its staff in Asia Pacific, growing from 250 to over 400 employees, in order to ensure full support for the company’s growing customer base. In addition, Triple Point extended its Asia Pacific footprint with the acquisition of QMASTOR, the premier provider of mining software solutions, headquartered in Newcastle, Australia. 

Read more about Triple Point Commodity Management solutions.

In our circles, when we talk about the Dodd-Frank Act, we tend to gravitate our conversations to Title VII – Wall Street Transparency & Accountability.  It is, of course, the most hotly disputed, high profile part of the legislation.   So, it’s easy to forget some of the other sections of DFA that may concern corporations.  One such section is 1502.

Section 1502 – Conflict Minerals

This section requires a disclosure that on the surface seems fairly well intended.  Since Congress has determined that “the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo and adjoining countries is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation”, corporations will be required to disclose their sources of “Conflict Minerals”.  Conflict Minerals include columbite-tantalite (coltan, niobium, and tantalum), cassiterite (tin), gold and wolframite (tungsten) and their derivatives. The State Department can add new minerals when they determine it is necessary.

Who will be impacted?

The impact will be broad, and will encompass all publicly traded companies that source the listed minerals. If you think about it, that covers quite a cross-section of industries: automotive, communications, electronics – you name it. By the SEC’s own estimates, at least 6,000 companies will be impacted. They will be required to disclose in their 10-K, 20-F and 40-F filings the use of “Conflict Minerals” in their products. Even if the source of the material cannot be established, that will also require disclosure. Lacking a de minimis provision in the law, any sourced quantity will necessitate disclosure.  The law also calls for due diligence, although that has not been entirely defined. In all likelihood the model of due diligence proposed by Organization for Economic Co-operation and Development (OECD), would serve as a template.

Court of Public Opinion

There are problems with distilling the complex problems of the Democratic Republic of the Congo to a sourcing disclosure and expecting it to be the solution.  There are legitimate tribal mining operations that are likely to suffer as a result of this requirement.  Regions of the DRC are not in conflict, but they are already witnessing the impact of the proposed rulemaking. According to a recent New York Times article, many mining operations in Eastern Congo have been damped or halted completely. And so the SEC struggles – delaying its final rulemaking yet again. With no established SEC guidelines, I would anticipate more mining operations to close. The concern among manufacturers is also heightened, and it is not just a cost of compliance issue. The fear is that the public’s perception will drive investment or product purchase decisions based solely on a DRC tag or a lack of traceability.  Keep in mind, the legislation does not make it illegal to source Conflict Minerals, it just requires the disclosure of that information. I’m all for doing the right thing here, but I’m just not entirely convinced that this is the right thing. Not for the people of the DRC or the corporate world.

I recently talked to Exxaro, South Africa’s second largest coal producer, about the challenges affecting the industry today and how they are transforming their business to meet the growing global demand for coal. A major part of their transformation has been to reengineer the supply chain so that they can produce substantially more coal and generate more revenue.

During our conversation, Melanie Steyn, Exxaro’s Coal Export Manager offered some fascinating insight into the risks posed by manual supply chains. Using spreadsheets to manage complex supply chains can result in inefficient production, financial penalties, high transportation costs and demurrage.

Melanie goes on to talk about their implementation of QMASTOR’s Pit to Port solution and the benefits it has brought Exxaro which include increased productivity, significantly reduced costs and a centralized view across all mines, stockpiles and terminals. Additionally, QMASTOR’s seamless integration with SAP EEC6 has enhanced efficiency throughout the supply chain.

You can read the interview here. I hope you find it useful and gain some tips on how to improve your supply chain. 

News-grabbing headlines highlighting commodity price increases due to weather-related and other supply issues have completely shifted the dynamics of Commodity Management and broader procurement, sourcing and supply chain management activities.

According to advisory group Spend Matters, organizations are observing radical commodity price fluctuations of up to 40% which are having a massive impact on their P&Ls. However, despite this volatility and its impact, precious investments in technology solutions and skilled resources often go towards other areas of the business rather than being allocated towards efforts to control, mitigate and manage commodity risk. Companies that allocate little or nothing towards Commodity Management head down a very dangerous path towards declining returns and higher risk profiles.

A new white paper from Spend Matters, “Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals,” explains that “now is the time for organizations to make the right set of investments in Commodity Management.” It outlines the business case for Commodity Management, including how to build a quantifiable argument to invest in the right team, processes and solutions to take action in the current environment. Read it now and learn how to prepare your organization to manage the dips, twists and turns of today’s roller coaster economy.

Are you struggling with disparate commodity trading systems, overuse of manual processes and spreadsheets, and underuse of third party solutions?  Have dramatic changes to the energy markets outpaced your technology capabilities?

If you know you need to upgrade your Energy Trading and Risk Management (ETRM) system, but are overwhelmed by the idea of ETRM vendor evaluation, ETRM system selection, and ETRM implementation, you are not alone. Structure’s Baris Ertan recently wrote an article on how to determine ETRM requirements.  He explains that if you ensure the right ETRM requirements, “you’ll be rewarded with a system that meets your needs and prepares the organization to take advantage of the opportunities afforded by today’s complex and ever-changing energy markets.”

A few tips that I found particularly useful include:

For more ideas on how to determine ETRM requirements, view on-demand Triple Point’s recent Commodity Trading, Procurement, and Risk 101 webinar.  It highlights the latest must-have requirements for ETRM success.

The South African coal industry received a huge boost last month when President Jacob Zuma used his State of the Union address to back critical infrastructure projects in South Africa. He announced a much needed investment of R200bn ($26bn) to help upgrade the capacity of the state owned rail network, Transnet, which currently limits the amount of coal South Africa is able to export.

Transnet is crucial to the future of the South African coal industry. Today, the volume that the rail network can carry is below the export capacity of their largest coal terminal (Richards Bay). Transnet have started upgrading the network which has brought improvements but also some temporary fluctuations in capacity. This boost from President Zuma could not have come at a better time.

South Africa is the world’s fifth largest coal exporting country. Once complete, the upgrades in the rail network will mean that they can export the entire 91m ton capacity of the Richards Bay Coal Terminal. The industry is already starting to plan how they can expand their export capacity to at least 100 million tons.

Exxaro, South Africa’s second largest coal producer uses Triple Point’s QMASTOR supply chain management systems to manage the tonnage, quality and value of coal and minerals from their mines to the point of export, import or consumption.