Commodity Management Blog

Innovative Ideas and Thought Leadership for Volatile Commodity Marketplace

Michael SchwartzI was recently interviewed for the Commodities Now special CTRM supplement by Guy Isherwood, Editor-in-Chief.  I’m sure some of you aren’t readers of Commodities Now (by the way, it’s an excellent publication) so I thought I would make the interview available via the blog.

Guy Isherwood [GI]: What new trends have you noticed in the commodities industry?

Michael Schwartz [MS]: The United Nations issued a press release a few weeks ago stating that the world population, which is close to 7 billion right now, will surpass 10 billion by 2100. Many analysts had believed that population growth would stabilize at around 9 billion globally. It’s amazing to think that the population was 800 million in 1800 and we’re on our way to 10 billion 300 years later. Along with the exponential growth, many non-OECD countries are adopting western life-styles and appetites.

Add to the mix that commodities are becoming 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. The net effect is that there is a long-term trend of higher commodity prices. In addition to higher prices, we will see more and more volatility caused by a tighter demand/supply equation.

From our perspective, we are seeing companies that have traditionally not been our customers start to adopt the same sophisticated commodity management systems that commodity trading organizations have deployed from Triple Point for years. These new industries include consumer products, chemicals, big-box retail and automotive. High prices and volatility in the raw material markets that these organizations depend on are not a wait-and-see problem, it’s the new reality.

[GI]: You mentioned that Triple Point is working with clients in the food and beverage, consumer products, and manufacturing industries. Can you comment further on what is driving interest from these companies?

[MS]: Higher commodity and energy prices coupled with greater volatility can harm profitability, shareholder value, and credibility with analysts for these companies. Organizations that use large amounts of raw materials and energy recognize that increased commodity volatility is not a short-term phenomenon but a fundamental change in the markets.

A CP executive recently told me that his company views increased raw material volatility as a 20 year issue, not a 2011 problem. Executives in these types of firms are increasingly aware that they can lose market share to competitors with a better strategy for managing commodity and energy prices. For organizations to be successful, the approach used by the purchasing department must be revamped from static “buy to budget” to a more proactive “market-based” procurement and risk management program. The traditional methods of handling rising raw material and energy costs, such as substituting cheaper materials in products and raising prices, might prove necessary but do not take advantage of commodity management best practices to optimize margins – and that’s why early adopters are turning to Triple Point.

[GI]: What extra demands are being made on managers for risk control, and how does Commodity XL™ address them?

[MS]: First and foremost, there are huge levels of price risk in the financial and commodity markets. It’s been reported that we’re seeing three or four ‘100-year risk events’ every year, and we’re almost certainly going to see more extreme events that are outside normal expectations.

Secondly, the recession has made everyone take a much closer look at credit. Credit risk managers used to triage potential counterparties into three groups – definite yes, definite no, and everyone in between. Now everyone is either rejected or sent for assessment. Finally, the markets are more closely regulated. Whether it is hedge accounting, fair value disclosure or the pending Dodd-Frank legislation, there’s no denying the growing importance of standards that require additional transparency into valuations and accounting methods.

Commodity XL™ is the only real-time commodity management and risk system that handles the four key areas of financial exposure set by the Committee of Chief Risk Officers on a tightly integrated platform: market/price risk; operational risk; regulatory risk; counterparty credit risk.

And this is not marketing hype – we’ve created the only true commodity enterprise risk platform by acquiring the leading credit and regulatory software solutions and integrating them into the Commodity XL platform. The solution breaks down individual information silos to get a clear picture of global exposure and firm-wide risk. The Management Dashboard™ business intelligence module provides executives with easy access to an accurate picture of the company’s total exposure.

[GI]: How do you see Dodd-Frank affecting energy organizations?

[MS]: A key challenge is the provision within the Dodd-Frank Act that applies to central clearing of OTC derivative trades (with Europe’s MiFID II legislation soon to follow). Dodd-Frank is a response to the credit crunch, but applies to energy organizations that use derivatives to hedge and reduce risk. The proposed legislation includes an end-user exemption clause for genuine hedging transactions. In order to take advantage of the exemption, firms need to test, document and report on a trade-by-trade basis.

Companies must be able to accommodate the accounting and auditability requirements as part of a complete, end-to-end solution. We’ve been saying for years that organizations can’t manage a commodity trading business on siloed-systems or spreadsheets – the new regulations might be the impetus that finally moves some companies off antiquated systems and unreliable tools.

[GI]: Gartner has named Triple Point Technology a leader in its Magic Quadrant (MQ) for E/CTRM solutions for the past three years. What are your thoughts about the MQ?

[MS]: Gartner is retained by 10,000 companies for its advice, and is top in its field, so it’s absolutely an honour for Triple Point to be consistently recognized as a leader.

What I find most interesting about the CTRM market is that it is evolving in a similar way to other major software markets where there are two leaders for enterprise solutions, like SAP and Oracle in ERP, and other vendors who fill niche areas. If you look at the CTRM Magic Quadrant over the last three years, it’s clear that Triple Point and OpenLink have become the leaders.

Gartner bestows leadership based on ‘completeness of vision’ and ‘ability to execute.’ When I started at Triple Point six years ago, there were five vendors of similar size. It’s been a testament to our market vision and execution that we’ve grown to three times the size of our competitors in those six years.

[GI]: What are some Triple Point highlights from 2010?

[MS]: In 2010, Triple Point launched new solutions for commercial chartering and vessel operations, freight risk management, trade confirmation management, cargo inspection, and strategic planning and procurement. We also announced several major enhancements to our European power and gas solutions.

Triple Point reported record revenue and 52% year-over-year EBITDA growth in 2010. We signed 105 new license transactions and added 41 new customers to bring our total number of customers to 260 companies. 2011 is shaping up to be another record year on all fronts.

We are investing in the success of our customers with several programs designed to encourage strategic alignment. Triple Point has appointed a Chief Customer Officer (CCO) with a commitment to serve customer relationships. Under the purview of the CCO, we’ve added a formal process for client satisfaction surveys and a Customer Driven Development program.

The commodities markets will always be volatile, presenting both huge opportunity and risk. In an industry that is both fast moving and complex, Triple Point will continue to provide its customers with the best solutions, product innovations, training and customer service to gain and maintain competitive advantage.