In recent years, the world agricultural markets have seen a surge in prices and volatility brought about by several factors including poor harvests, sustained demand, increased use of agricultural products for fuel, increased activity on commodity markets and soaring oil prices causing fuel and fertilizer costs to rise. As a result, Growers, Originators and Producers are starting to adopt CTRM systems, typically used by energy companies, in order to gain the real-time business intelligence they need to make optimal decisions around trade execution, position management, and physical logistics.
Triple Point has been helping traditional energy and commodity trading companies manage the unique complexities of their commodity trading and risk management business for over a decade. In order to help Agriculture companies identify the most critical components of a CTRM solution for their business, Triple Point has compiled a checklist of the key functionality Agriculture companies should look for when considering CTRM tools.
Here are seven to consider:
1. Trading – A CTRM solution should provide complete control over trading operations and enable traders to better manage current positions and gain real-time information to take advantage of market movement. It should integrate physical and financial trading, improve trading efficiencies with deal entry templates/blotters, provide sensitivity analysis, and enable “what-if” scenarios.
2. Price Risk Management- Look for sophisticated analytical tools for portfolio stress testing and sensitivity analysis to run what-if trades. These tools should enable you to analyze real-time position and exposure — market, volumetric, credit, delivery, and FX risk — at granular and rolled-up levels for optimized price risk management.
3. Chartering and Vessel Operations- Commercial chartering and vessel operations are a crucial part of the agribusiness supply chain and must be seamlessly integrated into the CTRM system. At a minimum, the system should allow you to manage all chartering, post-fixture activities including freight risk management, and financial aspects of commercial vessel operations in a single system.
4. Scheduling- Schedulers must be able to plan, conduct, and optimize complex physical movements in real time. The system should manage the logistical complexities and streamline the supply chain operations required to transport bulk commodities. It should handle all transactions from straight forward physical trade matching, to complex itinerary scheduling involving multiple trades, commodities, methods of transportation, and inventory movements.
5. Counterparty Credit Risk Management- Recent financial and debt crises demand the ability to proactively measure, manage, and mitigate the risk arising from counterparty default. The CTRM solution should address the entire credit risk process and provide a full range of credit analysis and operational tools in 3 key areas: exposure, collateral, and counterparty management. The most advanced solutions also provide credit analytics.
6. Hedge Accounting- A key component of any CTRM solution is the ability to manage the daunting set of requirements under hedge accounting regulations, including the detailed testing, documentation, and reporting that must be performed in order to qualify for hedge accounting status. Make sure that the solution provides full compliance with ASC 815 (FAS 133), ASC 815-10 (FAS 161), IAS 39 (IFRS 9) and similar national hedge accounting regulations.
7. Fair Value Disclosure- The system must provide the tools and framework to define, measure, and manage fair value levels and meet all disclosure requirements for ASC 820 (FAS 157) and IFRS 7 compliance.
In a recent article, Reuters ranked the world’s top independent oil and commodity traders, identifying Vitol Group, Glencore International AG, Cargill Inc., Koch Industries, Trafigura, and Gunvor International as the largest. Four of the top six organizations, Glencore, Cargill, Trafigura and Gunvor, rely on Triple Point’s commodity management software to effectively manage their commodities and enterprise risk.
Triple Point’s Commodity XL™ provides them with a real-time, enterprise view of position, supply chain, and risk. They use the enterprise, multi-commodity platform to deliver superior business intelligence for proactive decision-making and competitive advantage. Commodity XL integrates physical and financial trading, provides sensitivity analysis, enables “what-if” scenarios, and improves business process efficiency across front, middle, and back offices.
Our mission from day one has been to provide the most advanced systems, tools, and models to help clients profitably trade, transport, and store commodities, as well as manage the associated risks. Seeing the top commodity traders in the world benefit from our products reaffirms Triple Point’s position as the leader in energy and commodity management software.
The historic downgrade of the US government debt by Standard & Poor’s (S&P) on Friday has shaken the markets worldwide. Brent Crude dropped $10 and suffered the biggest two-day decline since 2009— highlighting just how quickly commodity markets can swing in the heat of a crisis. Rueter’s reported yesterday that Brent crude fell to $98.74 a barrel, the lowest intraday price since February 8, and was down from an April peak above $127. This week’s market turmoil leaves many asking, what must I do to survive in this global economic uncertainty?
Analysts are warning that oil prices could fall further if a second recession takes hold, but both Merrill Lynch and Goldman Sachs maintain their 2012 price forecasts.
“We believe that WTI crude oil prices could briefly drop to $50 under a recession scenario,” Merrill Lynch said in a note, but it maintained its 2012 average forecast for U.S. crude at $102 and its forecast for Brent next year at $114.
“I don’t think anyone has a clear picture right now,” Brian Hicks, co-manager of the Global Resources Fund at U.S. Global Investors, said Monday, when oil finished the day at $83.10 a barrel. “There are just too many question marks.”
Chief among them: How will the debt downgrade affect U.S. economic growth? Will U.S. consumer spending remain low, and will that impact factory production in China? Will Italy or Spain default on their debt, driving Europe into a recession?
In the midst of this week’s high volatility and uncertainty, C-level executives are turning to their risk managers and asking, “What is our exposure if a double-dip recession becomes reality? What happens to our balance sheet if crude drops to $50? How can we drive profit from this record-setting volatility?” These questions are very difficult, if not impossible to answer with spreadsheets.
Once again, the market is reminding us that it is absolutely critical to have the technology and analytical capabilities in place to run shifting scenarios and understand enterprise-wide commodity exposure. Do you think that commodity price volatility is going to go away? Or that policy risk and global economic uncertainty is waning?
In this environment of rapidly changing information it’s vital to at least have certainty that your data is correct. Triple Point’s Commodity Management Solution provides accurate, up-to-the-minute risk intelligence— arming you with the information you need to make decisions with confidence and certainty. And who doesn’t need a little certainty in these uncertain times?
In January of 2008, Triple Point acquired Softmar, the leading provider of software to manage chartering and vessel operations, including freight risk management. As the freight derivatives market grows in sophistication — so must the range of strategies used. The acquisition enabled Triple Point to immediately provide our customers with solutions to optimize freight management and deepened our solution suite to offer market-based, commodity supply chain management across sourcing, transportation, inventory, operations, and product marketing. In today’s complex and ever-changing commodities markets, the most successful companies are those best prepared to identify risk and model its dynamics, measure and quantify the impact of risk across the enterprise and on financial results, and manage and mitigate risk with an integrated platform that enables better and more proactive decision-making.
Recognized as an industry leader in managing end-to-end shipping operations, we were honored to be invited by Professor Manolis G. Kavussanos and Dr. Ilias D. Visvikis to participate in a book published by Incisive Media, titled: Theory and Practice of Shipping Freight Derivatives. Our Managing Director of Chartering and Vessel Operations, Michael Lolk Larsen, authored the chapter which examines electronic trading software requirements for the freight derivatives market.
Although roughly 90% of the world’s traded goods by volume are transported by sea, industry surveys show that approximately 80% of companies are still attempting to manage commercial vessel operations and freight risk through the use of spreadsheets! This creates layers of information that are not transparent to other business units, leading to greater operational risk. Triple Point’s chapter examines how sophisticated software, such as our flagship Chartering and VesselOps™ solution, enables ship owners, charterers, and operators to successfully manage freight risk holistically by integrating physical and paper markets. It provides an overview of the freight derivatives market and examines the interconnected relationship between chartering, vessel operations, and freight risk management. I highly recommend the book as essential reading for all members of the shipping and financial communities. You may purchase the book here.
About the Book
Freight rates and their fluctuation constitutes the most significant source of shipping risk. This increasing recognition has brought with it a significant amount of derivative products, which have begun to offer more effective, flexible and cheaper ways to manage risk. The book provides practical coverage of shipping freight rate derivatives, detailed by leading expert practitioners in the field, and offers best practices from different points of view. I highly recommend the book as essential reading for all members of the shipping and financial communities. You may purchase the book here.
Other chapters in the book include:
- The Structure of the Freight Derivatives Markets
- Credit Risk and the Benefits of Clearing Services
- The Ship Owner’s and Charterer’s View and Practice of Freight Derivatives
- The Bankers’ Perspective of Freight Derivatives
- Accounting and Tax Perspectives
- Setting up a Freight Rate Risk Management Department
Two articles that were published in the Financial Times (FT) on the same day this week caught my attention: “Prices soar as China goes nuts for cashews.” and “Wary investors pull back on commodities.”
So are commodity prices heading to new highs or are we on a path to a sell-off?
Nuts are one more example of a commodity that has hit record prices driven by the growing middle class in China. China’s “appetite for healthier living among the country’s fast-growing middle class has stoked demand for nuts, sending prices of cashews and other snacks to record levels…. Cashews, walnuts and pecans, for example, are at record highs, with cashew kernels trading at $4.55 a pound, up more than 60 per cent from a year ago. Walnuts in their shells have risen 43 per cent and pecan kernels are up 38 per cent.”
The second article discusses commodity investors rapidly moving funds to other investments. “In the past two months, (investors) have pulled money out of the asset class at the fastest rate since the financial crisis. Barclays Capital estimates investors withdrew $6.9bn from commodity markets.”
So are commodity prices still going up driven by a growing population and middle class in countries such as China, or are prices going down as presaged by the investors withdrawing money?
A third article in the FT on copper prices might shed some light. “Copper prices touched $9,500 a tonne for the first time in more than two months as signs of improving Chinese demand encouraged investors to make a tentative return to the market. The price of copper had slipped 16 per cent from a peak of more than $10,000 in February to a low of $8,504.50 in May, amid signs of slowing demand from China, which accounts for 38 per cent of global consumption.”
Why could copper prices be telling? Copper has gained the nickname Dr. Copper — it’s said to have a Ph.D. in economics because of its ability to forecast the global economy. Copper is used by most industrial sectors, including housing, automobiles, appliances and electronics, and is typically a reliable leading indicator for directional changes in the economy. Copper came off its peak $10,000 per tonne, slid to $8,504, and now is back to $9,500. Maybe that’s the answer in the short-term — we’re not soaring to new peaks but we’re not in a sell-off either.
From a Triple Point perspective, the short-term moves in commodity prices are fun to watch but not the point. The key point is volatility, volatility, volatility, coupled with a longer term trend of higher prices. It seems very clear (read my previous blog on commodity prices and volatility) that we have a growing global population with more “western-like” appetites in food and consumer goods. And commodities are getting harder and more costly to get out of the ground, whether it is oil from tar sands in Canada or iron-ore from less developed regions like Zambia. I absolutely believe we will have higher commodity prices at the end of this decade than we do now. In addition to higher prices, we will see more and more volatility caused by a tighter demand/supply equation.
There are any number of reasons why firms should take enterprise counterparty risk seriously, and manage it appropriately. A perceived failure will start investors, rating agencies and counterparties questioning an organization’s business processes and corporate governance procedures. The merest whiff of a rumor of default on a margin call, or over-exposure to a downgraded counterparty will start the wolf pack circling.
Failure to manage credit risk across the entire company can put organizations on a collision course with a market, that has shown little forgiveness for both real and perceived mis-steps, and regulators demanding greater transparency. It means that business decisions are being made on incomplete or inaccurate data. It severely blinkers a firm’s vision of the future, and hampers its ability to move forward. And, at a time when cash is king, it can have a very deleterious effect on liquidity.
Constellation – a firm with a previously strong reputation for sophisticated risk management – knows all about credit risk failure. In August 2008, the power producer shocked investors when it revealed that it had made an accounting error and underestimated its potential liabilities in case of a ratings downgrade. Both Standard & Poor’s and Fitch Ratings swiftly downgraded Constellation’s credit. Constellation was so large and appeared to be dependent on multiple lines of credit from various banks that were, at the time, either wobbly or are going under, that the perception developed that it was at risk.
Despite Constellation’s efforts to reassure investors of its excess liquidity, good balance sheet and solid commodities trading business, it got caught up in the spokes of Lehman Brothers’ death spiral.
Over three days in September 2008, Constellation’s stock lost nearly 60 per cent of its value as it was dragged into a world of plummeting share prices and eventual sell-offs.
And yet, post-Constellation, post-credit crunch, even post-Enron, when we know that the wrong numbers can do untold damage, many companies are still using a simple spreadsheet to stand between them and potential ruin. Instead of managing credit risk in a holistic fashion, based on consolidated, auditable data from across the organization, businesses rely on error-prone processes that perpetuate the stove-piping of data sets.
Worryingly, a CommodityPoint survey, sponsored by Triple Point Technology, of energy and commodity executives discovered that 70 per cent of companies are using spreadsheets or internally assembled systems to manage counterparty credit risk. While 60 per cent of the companies surveyed felt the need to upgrade their credit risk systems to manage counterparty risk effectively in the current business environment.
If companies do not wish to follow in the footsteps of Constellation, Lehman and Enron, they must grasp the central tenets of credit risk management which we call the five Cs: counterparty, contract, collateral, concentrations and credit analytics.
Forget air miles – approximately 90 per cent of the world’s bulk traded goods are transported by sea, making shipping the lifeblood of the global economy. The United Nations Conference on Trade and Development (UNCTAD) estimates that in 2008 the shipping industry transported more than 7.7 thousand million tons of cargo.
Advances in technology have made shipping the most fuel-efficient and carbon-friendly form of commercial transport available. And all current trends and trading patterns indicate that an even greater proportion of the world’s trade will be carried out by sea in the future. Without shipping, the transport of crude oil, coal, iron ore and raw materials, including feedstocks and metals, would simply not be possible. Intercontinental trade in affordable food and manufactured goods would cease to exist in all but the most niche and exclusive areas. International supply networks would break down.
But with approximately 50,000 merchant ships traversing international trading routes, the freight market can be summed up in two words: volatile and complex. Ship owners, operators and charterers have to navigate an intricate, multi-faceted and inter-dependent freight market and are at the mercy of hundreds of events that can impact the cost of transport – and hence profit margins – every day.
The prevalence of piracy off the Somali coast and in the Gulf of Aden is perhaps the most obvious and has caused shippers either to pay exorbitant war risk insurance premiums, or to re-route and add delays and extra fuel costs to the journey. UNCTAD’s 2009 Review of Maritime Transport found that, based on 2007 data, re-routing 33 per cent of cargo from the Suez Canal to the Cape of Good Hope because of piracy concerns would cost ship owners an additional $7.5 billion per annum. These costs will ultimately be passed on to consumers.
It’s not just piracy that causes problems. Even if traffic through the Suez Canal were to be re-routed, other key shipping ‘choke’ points remain. Congestion in the world’s strategic shipping lanes, such as the Panama Canal, the Bosporus, the Straits of Hormuz and Malacca, as well as the Suez, can cause significant delays and add costs to journeys.
But even with a safe route planned out, other challenges inherent to the shipping industry remain to confound its participants and their profit margins. Seasonal differences, whether it is iced up ports, swollen river levels, or the size of harvest, have to be taken into account, for example. But even these fluctuations in weather and climate provide a more predictable framework of operations compared to demand for commodities, which can change rapidly in response to the ebb and flow of the global economy and industrial production in specific countries.
Equally hard to predict is price volatility for bunker fuel – which accounts for at least 25 per cent of the cost of running a vessel. What participants in the shipping industry do know is that climate change restrictions are coming into force. The cost of ships’ fuel is expected to increase by a further 50 per cent as result of the increased use of low-sulfur distillate fuel that will follow the implementation of the new IMO rules (MARPOL Annex VI). These will reduce the allowable sulfur content to just 0.1 per cent in 2015, down from the 1.5 per cent permitted today in prescribed Emission Control Areas (ECAs) – currently the Baltic Sea, North Sea, and certain shipping lanes around the US and Canada. Outside these ECAs, shippers are obliged to reduce the sulfur content of fuel from 4.5 per cent to 0.5 per cent. The IMO rules therefore add to the complexity involved in planning routes effectively, ensuring the right ships make the right journeys and optimising fuel consumption.
Then there is the size of the available fleet that has to be borne in mind: too few or too many vessels directly affects prices, which in turn affects freight rates. And finally, trading finance and credit conditions can positively or negatively affect both investment spending and consumer activity.
Managing all these elements – and many more – is critical for successful shipping operations, particularly as prices of fuel, commodities, cargo, credit and vessel hire continue to fluctuate once a ship has embarked on its journey.
Turbulent economic conditions combined with stringent and uncertain regulatory reform are bringing dramatic changes to the face of energy and commodity credit risk. Don’t just cross your fingers and hope a catastrophe won’t happen to your organization.
Triple Point recently hosted a webinar on The New Rules of Counterparty Credit Risk and how you can prepare for potential economic & regulatory pitfalls with a flexible and transparent credit risk system.
In case you missed the live webinar, here is a link to download the webinar and view at your convenience.
In this webinar, Triple Point’s Vice President, Credit Risk Division, Dan Reid, discussed how Triple Point’s Commodity XL for Credit Risk™ will safeguard against counterparty credit risk failure and growing regulatory demands. Attendees learned how our solution will deliver an ROI to their business through liquidity savings and business expansion, how to reduce reliance on credit rating agencies, the impact of Dodd-Frank, Markets in Financial Instruments Directive (MiFID) and Market Abuse Directive (MAD) on credit risk management, and more.
To learn about the implications of market volatility and financial reform on credit risk, and how you can safeguard against counterparty credit risk failure, download the webinar below.
A new trend is emerging in the manufacture of automobiles. Faced with fundamental changes in the metals, chemicals, plastics and energy market environment, global organizations have begun to look at energy companies and commodity houses and wonder whether they could benefit from the types of technology platforms deployed by these institutions.
For years, the world’s most successful energy companies and global commodity houses have relied on sophisticated commodity management platforms that enable them to proactively manage purchasing, demand/supply balancing and risk management of raw materials and financial derivatives. These systems also provide logistics tools, accounting and decision support that create a complete commodity management platform that enables companies to optimally balance between cost, profit and risk.
Automotive manufacturers and suppliers are now recognizing that these same systems can help manage raw material risk and preserve profit margins in the face of today’s unprecedented commodity volatility.
The new normal: volatility, volatility, volatility
The focus for supply chain groups over the past fifteen years or more has been on efficiency (and speed). Manufacturing and supply chain techniques such as just-in-time, inventory management, demand-driven supply networks and total quality management were introduced to eliminate waste, reduce inventory and improve quality.
These efforts have led to a striking reduction in buffer inventories, bringing them down to the bare minimum. At the same time these leaner supply chains have become more global as organizations look for lower cost suppliers and new markets in which to sell products. A side effect of this is that the ability of businesses to handle unforeseen shocks to the system such as sharp raw material volatility has been significantly limited.
We are experiencing unprecedented levels of volatility in all kinds of commodity markets. The vehicles that roll off today’s assembly lines contain hundreds of raw materials – as do the machines that make them. Automotive companies therefore have some of the most diverse and complex procurement portfolios, which represent equally complex supply networks and a broad series of commodities markets – any one of which can be experiencing severe volatility at any given moment.
Gartner recently published its 2011 Magic Quadrant for Energy Trading and Risk Management Platforms.
Here are my take-aways from this year’s report:
- It’s the 3rd straight year that Triple Point is positioned as a leader
- The gap between the 2 top leaders (Triple Point and OpenLink) and the rest of the vendors is getting wider each year
It’s interesting to see the ETRM market evolve similar to other software markets where there are 2 lead vendors (such as SAP and Oracle in ERP) and a handful of other vendors that fill niches.
Triple Point has purchased the rights to the report; below is a link to view a complimentary version of the full 28-page report.