Commodity Management Strategies and Tools

Just a few years back, there were many articles discussing “Peak Oil” and whether the world had already passed the peak.  A typical headline was one in Fortune Magazine in 2008 with a headline predicting a dramatic increase in oil prices – “Here comes $500 oil.”

At the recent HIS CERA Week, it was reported that “Peak Oil” was already a distant thought for most presenters, and that much of the talk was about growth in natural gas and oil from unconventional shale resources in the U.S.

According to the U.S. Energy Information Administration (EIA), crude oil production in the U.S. exceeded an average seven million barrels per day (bbl/d) in November and December of 2012, the highest volume since December 1992.

The International Energy Agency (IEA) predicts that the United States will overtake Saudi Arabia and Russia to become the world's leading oil producer by 2017.

The WSJ MarketBeat Blog notes we are only at the beginning. “U.S. tinkerers discovered a way to extract oil and gas from shale, the source rock for oil and gas that was previously deemed uneconomical. That has boosted U.S. production to levels not seen in two decades, and that’s only the beginning: shale recovery factors could improve, and vast shale formations in Argentina, China, Russia and other countries are yet to be tapped. If technology ever allows the industry to recover 70% of oil from conventional reservoirs and to double or triple the current recovery rate from unconventional resources, the world could almost quadruple the reserves of global liquids.” 

In addition, Iraq passed a critical milestone last year by producing three million barrels a day of crude oil for the first time since before the Persian Gulf War, reaching a high of 3.4 million bbl/d in December. Given its access to vast reserves at low costs, Iraq could play a significant role in the growth of energy supply.  Of course, in Iraq there is much geopolitical risk attached to supply.

Even with increased production, there was still not enough oil to meet demand in the beginning of 2013.  The EIA estimates a 1.3 million bbl/d average draw-down in global oil stocks for January and February.

There are numerous uncertainties as we move forward including the rate of technology advancements, geopolitical risk in many energy rich nations, growth in demand as the world continues its economic recovery, etc.  Perhaps the only certainty is continued volatility and the need for oil trading risk management software to manage the volatility.

As Jim Rogers, Chairman, President, and CEO of Duke Energy has been known to express in speeches, “Ben Franklin said there are two certainties in life: death and taxes. To that, I would add the price volatility of natural gas.”

The future of energy is going to be quite interesting!

Oil Trading SolutionThe gas in our cars, cleaning chemicals in our cabinets, and reusable cups from which we drink our coffee or tea all have ties to the crude oil industry. As feedstock for a wide array of goods, crude oil and crude products are among the most widely traded commodities in the world. The market attracts diverse participants; however, many of the challenges faced are universal.

CommodityPoint’s latest white paper, “Global Oil Markets- Increasing Uncertainty and Risk,” highlights several of these challenges and concludes that now is the time to invest in an advanced energy trading and risk management (ETRM) software solution to combat rising volatility.

This white paper discusses how the political unrest affecting many of the world’s crude-producing regions is having a direct effect on oil supply. Tensions in the Middle East threaten to shut down the busiest port in the region, which could interrupt the delivery of 17MMbbl/day. Should this situation come to fruition, market volatility will be further exacerbated, and those companies that are not properly equipped to manage it will suffer.

While the threat of a continued reduction in crude supply looms, crude demand continues to grow each year. CommodityPoint’s paper suggests the only way to effectively navigate the market fluctuations caused by scenarios such as this is to implement a sophisticated trading solution that can not only capture, manage, and value trades and hedge positions; but that can also model the entirety of the physical operations of market positions. Read the paper now and find out why it’s imperative to have an ETRM solution such as Commodity XL™ that provides an integrated, real-time view of physical and financial exposure alongside operational, credit and regulatory risk exposure.

Download the CommodityPoint white paper

Uncertainty looms large in the European Gas and Power markets. What could cause the next big shock? Are you confident you are prepared for the next crisis? Policy developments and structural changes, such as the Electricity Market Reform (EMR) initiative in the UK, may drive extreme price volatility and uncertainty.

Triple Point recently hosted a webinar on
How to Survive and Thrive in Volatile European Gas and Power Markets.  One of Baringa's European Energy Market experts, Nick Tallantyre, shared the key issues driving volatility in the European Gas and Power Markets –– and how to protect against them. Triple Point's Mark Earthey provided an in-depth overview of Triple Point's European Gas and Power Solution.  


It was a very interesting event full of valuable ideas on how to gain clarity in today’s uncertain world. Attendees learned:

  • Key market implications arising from the structural and policy changes to the energy markets e.g. the Electricity Market Reform (EMR) programme in the UK
  • What European market participants must do to prepare for growing global market connectivity
  • Proven strategies to protect against market volatility
  • How to optimize portfolios and improve trading operations
  • How Commodity XL provides a real-time view of exposure, manages enterprise risk, and handles scheduling — all on an integrated platform
View the webinar on demand here.

The US Midwest is suffering its worst drought in decades.  The US Department of Agriculture (USDA) recently dropped its corn yield forecast from 166 bushels per acre, made earlier this year, to 123 bushels per acre.  The expected shortage of corn is causing prices to surge.

Corn has multiple uses – it is used as fuel (ethanol), animal feed, or directly as food.  Roughly 40% of US corn production goes towards ethanol, 36% towards feed, and the rest towards food.

There are several concerned groups that believe the Environmental Protection Agency (EPA) should relax the ethanol requirement under the Federal Renewable Fuels Standard act, which states that there must be 13.2 billion gallons of corn starch-derived biofuel produced in 2012.  The UN has called for an immediate suspension of the US-mandated use of ethanol.  In addition, a coalition of beef, pork, and poultry producer associations have called for a cessation of the ethanol requirement.

Whether the EPA will ease the ethanol requirement is not the most important question – the real question is how do we plan to deal with rising agricultural commodity prices and volatility in the long term? The corn shortage might be a one season event, but volatile agriculture and softs prices are here for the long term. 

We have an expanding world population that is forecasted to grow from 7 billion to 10 billion in the next 35+ years.  As part of this population growth, there is a rapidly growing middle class across China, India, and other parts of Asia.  China and India alone are doubling their per capita incomes at approximately 10 times the rate and 200 times the scale achieved by Britain’s Industrial Revolution in the 1800s.   This growing middle class wants to eat higher on the protein scale (more meat which needs more animal feed).  And it appears we’ve hit a pattern of severe weather events including droughts, floods, extreme temperatures, etc.   These long term trends will drive acute commodity price swings – which is, as we’ve said before, the new normal.

All companies in the food supply chain, from upstream to downstream, should be putting plans and commodity risk management systems in place to handle price volatility.

Mobile Commodity ManagementIn just a few years, mobile technology has reshaped the landscape for businesses everywhere. The growing presence of smartphones and tablet devices in the workplace has forced companies to take a sharper look at the benefits mobile applications offer.

Previously, it was impossible for certain jobs to be performed away from a workstation. The mobile revolution has changed those rules. With the arrival of powerful mobile devices and sophisticated mobile applications, it is now possible for employees to perform tasks, previously restricted to their desktops, from any location at any time. And therein lies the value that mobile technology can offer: the ability to untether employees from their workspaces while increasing productivity. For this reason alone, companies are exploring ways to adopt new mobile solutions into their infrastructure in order to maintain an edge over the competition.

Software vendors across all industries are looking for ways to establish themselves in the mobile frontier. The challenge facing these vendors is to find a way to deliver solutions that make sense in a mobile world. The first temptation is to simply repackage existing desktop software and offer it on mobile platforms. This tactic fails, however, to recognize that a mobile solution cannot comfortably accommodate the same movements and actions that might be found in standard computer software. Vendors must accept that the answer lies in preserving functionality while promoting simplicity.

This fundamental concept has helped distinguish the visionaries in mobile technology from the rest of the competition. As software industries saturated with players hum with promises of new mobile initiatives, only a handful of companies actually deliver on such promises. This is especially true of the Commodity Management world. For almost two decades, Triple Point Technology has outpaced its competitors in this industry by producing unmatched Energy and Commodity Trading and Risk Management (CTRM) solutions. When it comes to mobility, Triple Point is the only Commodity Management company today that has managed to bring mobile CTRM products to market. In just under a year, Triple Point has already managed to produce four distinct mobile applications capable of transforming the way companies manage commodities by empowering staff to perform key operations anytime, anywhere.

To read more about Triple Point’s mobile commodity management solutions, click here

There have been several recent announcements from Delta Airlines related to jet fuel and oil trading.

According to Reuters, Delta Air Lines Inc. reported a second quarter loss because it took $561 million in charges for fuel hedges.  Part of the loss was taken for mark-to-market adjustments on open hedge contracts. 

It appears that Delta has chosen not to apply FAS commodity hedge accounting treatment.  Many of the news reports called these derivative purchases “bets” when in fact they are hedges that reduce risk. 

If Delta used hedge accounting it would match the loss of open fuel derivative contracts against future jet fuel purchases and not show the loss in the current period. Hedge accounting is extremely complex, and an advanced, auditable software system is required to support the adoption of these procedures.

Separately but related to managing fuel cost and risk, Delta announced that it completed its acquisition of the Trainer Refinery in Pennsylvania through its Monroe Energy subsidiary.  Delta will move jet fuel from the refinery to its hub airports in the Northeast.  Additional refined products such as gasoline and diesel fuels will be traded for jet fuel in other parts of the country. Delta spent about $12 billion on jet fuel in 2011 and expects to serve 80% of its domestic jet fuel needs from the Trainer refinery and related deals.

Delta is the first airline to own refining capacity. It will be interesting to observe if other airlines follow suit and move to vertically integrate their energy supply chains. 

Supplying a refinery with crude oil and trading products requires sophisticated energy trading and risk management (ETRM) software.  With volatility seemingly increasing daily in the commodity and crude oil markets, it seems prudent for Delta to invest in a hedge accounting and oil trading and risk management platform.

Four years ago Triple Point acquired INSSINC, the leading commodity hedge accounting software solution, and integrated it into its energy trading and risk management (ETRM) software solution.  At that time, Triple Point recognized the need for an integrated commodity management platform that seamlessly integrates all key risk areas.

The new volatility reality demands that all industries with exposure to commodities and energy review their current risk systems to ensure they are appropriately protected. 

commodity-procurementHeavy users of raw materials face a huge challenge. The prices of many of the world’s key commodities reached all-time highs last year, and volatility across the markets was more than enough to create huge problems for companies in the industrial manufacturing and consumer products industries.

It’s easy to find startling examples of price volatility in every category from arable crops and metals to timber, oil, and chemicals. And it’s also easy to see the consequences of such volatility in companies’ bottom lines – time and time again, there are stark reminders that sharply rising raw material costs can impact profitability.

For example, spice and condiment manufacturer McCormick saw first quarter profits hit by 3% because of higher than expected raw material costs. And Swiss agribusiness company Syngenta cautioned that its 2012 results would be impacted for the same reason.

According to a new white paper on Commodities Management from Procurement Leaders, there are several ways to fight back, including hedging, forming strategic supplier alliances, and leveraging advanced technology solutions. The paper provides a good primer on the subject, and discusses how companies including Unilever have successfully controlled skyrocketing raw material costs. Read it now.

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:

1. Understand your data environment

2. Review and document your current credit processes

3. Consider a modular approach

4. Carefully consider product enhancements

5. Manage your common data

6. Enforce good business processes


Beyond protecting you from losses, credit risk systems can help you better understand traders' profitability – neither of which you can do with spreadsheets. Read more about Triple Point’s award-winning credit risk solution, Commodity XL for Credit Risk™.


Oil-Trading-SoftwareA 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.

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Events

Procemin 10th International Mineral Processing Conference

October 15-18, 2013 | Chile

XXV Brazilian National Meeting of Mineral Treatment and Extractive Metallurgy (ENTMME)

October 20-24, 2013 | Brazil



Opinions expressed on this blog are those of its individual contributors, and do not necessarily reflect the views of Triple Point Technology, Inc.