Addressing Commodity Market Challenges With Digitalization Enabled By Platform Technology

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ADDRESSING COMMODITY MARKET CHALLENGES WITH DIGITALIZATION ENABLED BY PLATFORM TECHNOLOGY

Addressing Commodity Market Challenges With Digitalization Enabled by Platform Technology

A ComTechAdvisory Whitepaper

NON-STOP MARKET CHALLENGES The pace of change in the global commodity markets is accelerating and historical relationships among buyers, sellers and traders, and even the markets in which they operate, are being interrupted, reformed and reshaped at an ever-increasing pace. Trade wars, military conflict, climate change initiatives, regulatory mandates, sustainability and even as recently demonstrated, market shocks brought about by disease pandemics are shifting supply sources and demand patterns and interrupting industrial output, forcing commodity trading companies to adapt in almost real time.

Though many of these challenges may be shortlived, countless longer lasting structural changes are

companies are engaging in appropriate risk practices and have the systems and process in

buffeting global commodity markets: • New trading venues and exchanges are being created, and new instruments launched across virtually all commodities, particularly in China and surrounding countries. Automated trading is an increasingly large proportion of trades in many markets - particularly more mature markets where local price variations are being eliminated (e.g.

European power markets) - reducing trade margins and arbitrage opportunities. Maintaining profitability in these markets requires cost reductions throughout

place to limit downside market risks.

• Environmental regulations have become more pervasive, particularly among Western governments as the movement to a low carbon future accelerates.

Limitations on CO2 are impacting virtually all commodities classes, including hydrocarbon fuels, renewable energies, and even agricultural and softs products such as proteins, animal feeds and so on. The new environmental rules are forcing a restructuring of asset portfolios, increasing compliance costs and often reducing financial

the supply chain by improving efficiencies.

• Increasing regulation and intrusive oversight in the form of a myriad of market rules (often regional and/or local in extent) are impacting all aspects of commodity supply chains and trade, such as IMO2020 for marine fuels sulfur content.

Stakeholders, including banks, investors and financiers, are exercising more oversight and demanding more assurances that their client

returns on existing assets.

• Changing consumer demand is favoring commodities and products that can demonstrate socially responsible and sustainable supply chains – e.g. green power, commodities produced without child labor or deforestation etc. Addressing these new market influences requires investments in traceability solutions and may require alternative sources of supplies or new methods of production.

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Addressing Commodity Market Challenges With Digitalization Enabled by Platform Technology

A ComTechAdvisory Whitepaper

Recognizing these and numerous other challenges,

improve business agility by streamlining business

progressive commodity-centric firms, from traders to

processes, accelerating information flow and providing

CPGs, are increasingly undertaking “digitalization”

their commodity procurement and trading groups the

initiatives - leveraging existing and emerging technology

tools necessary to optimize their operations across the

(such as ML and AI) to gain greater market insights,

breadth of their markets and supply chains.

LEGACY SYSTEMS ARE PROVING INADEQUATE Unfortunately, the traditional technology infrastructures that support commodity traders, merchants and producers are proving largely inadequate in these digitalization efforts. In particular, the CTRM and CM products common to these markets, and usually comprised of monolithic code bases, are proving to be particularly inflexible and limiting in digitalization projects.

These systems are purpose-built software products modeled to mimic and capture data from the highly specific business processes of the customers they serve. As the vendors of these products have tried to continuously expanded their customer bases over the last twenty-plus years, these systems have become increasingly complex as new functionality has been added to keep up with changing market rules and conditions and address new markets or new and more complex commodities. As these new requirements are “baked-in” to those existing systems, the data structures and business logic grows exponentially complex, increasing the costs and difficulty of maintaining and upgrading those systems for their users. For customers that transact in a limited number of commodities or markets, these one-size-fits-all code

upgrades associated with these monolithic systems are particularly burdensome and continually increase system complexity without providing any discernible value.

Perhaps most critically though, and aside from rapidly rising support costs and increasing difficult and time-consuming maintenance and upgrade efforts, these older technology platforms are also proving to be a roadblock on the path to digitalization. Based on extremely complex relational databases with oblique table structures designed and optimized for performance, not data access, the critical information contained within these CTRM/CM systems is cloistered and essentially unavailable to users outside of screen dumps, canned reports or very limited APIs.

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Addressing Commodity Market Challenges With Digitalization Enabled by Platform Technology

Advanced analytics, a goal common to most digitalization efforts, can be particularly an issue for these systems. Few if any CTRM/CM solutions supply advanced capabilities to model and optimize supply chains and the physical assets that comprise them. As such, users are often left to either develop custom data extracts or manually input pricing and

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position information from those systems into analytics solutions, either homebuilt or 3rd party. Unfortunately, these processes are error prone and/or can impart considerable latency into the analytics process, rendering the analysis suspect and outdated, and undermining the return on the digitalization investment.

A NEW APPROACH IS NEEDED Though many legacy CTRM vendors have sought to leverage cloud deployment to present a more modern approach to potential buyers, the reality is that most of these “new” cloud applications are simply a re-platforming of existing monolithic code. Without having been designed initially to run in the cloud, they are unable to take advantage of “cloud native” capabilities such as ondemand processor scaling to increase performance, rich APIs that permit rapid integration with both internal and external data sources and systems, and seamless upgrades and maintenance.

While a few recent CTRM market entrants have developed multi-tenanted cloud solutions that can provide the advantages found only in products developed specifically to run in the cloud, these applications are limited in their commodity coverage and functional scope. Market experience with these systems indicates they may be a workable solution for a smaller company that trades one of a very limited range of commodities and in a specific market region. Unfortunately, as those user companies attempt to scale their businesses outside of their designated commodity and/or market, they quickly find these solutions are unable to address their new requirements - forcing that company to either build custom software or find one or more alternative systems; and in the process, burdening their resources with time consuming and costly software selection and

implementation projects.

The market has also seen the introduction of software “platforms” in recent years. With a platform approach, the vendor provides an open architecture solution (either via the cloud or installed onsite) that addresses common though generally non-industry specific business processes, along with the technical infrastructure necessary to support and administer the system. Some platform vendors may also provide some industry-specific capabilities in the form of applications or micro services for larger markets (such as financial services); however, very few if any platform vendors have the industry knowledge to address the wide variety of very specific capabilities required by physical commodity traders. For customers operating in the

© Commodity Technology Advisory LLC, 2020, All Rights Reserved.

Addressing Commodity Market Challenges With Digitalization Enabled by Platform Technology

physical commodity markets, these established platform vendors will provide a toolkit with which their clients can design and build their own custom capabilities.

The ability for customers to use their own resources to extend the capabilities of the platform as the need arises does reduce reliance on costly vendor support and is a key advantage over traditional monolithic software systems like legacy CTRM/CM products. This ability to

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create and quickly integrate new capabilities improves business and technology agility and helps ensure the customer’s critical trading systems can support new business priorities. However, while software platforms have proven successful in financial trading markets, their developers’ lack of knowledge of, and inability to support, common capabilities required by physical commodity traders and merchants has limited their success in these markets.

ADDRESSING THE SHORTCOMING OF TRADITIONAL ETRM/CTRM – EKA’S APPROACH Several years ago, Eka recognized the growing limitations of traditional CTRM/CM solutions… including their own. With rapidly changing global commodity markets and the need for their customers to digitalize their businesses to in order to remain competitive, the company adopted a new strategy to create a cloud-based commodity market software platform that could address the legacy issues of CTRM/CM and become a “hub” of data and information from internal and external sources (many via pre-built integration apps). When combined with additional capabilities in advanced analytics, including AI, the platform can then become the enabler of a digitalized enterprise – automating manual processes, accelerating data and information flow, and reducing or eliminating the use of spreadsheets.

The result of Eka’s multiyear development effort is the Eka Commodity Platform – a new solution and approach that leverages the flexibility and extensibility of a platform; yet one that addresses the very specific business process complexities found throughout the commodity trading and commodity management markets and along their value chains.

Eka’s platform was designed from inception to run in the cloud, providing the scalability and accessibility (including mobile access) required by commodity trading and management companies. Additionally, and as opposed to non-industry specific platforms, Eka’s Commodity Platform delivers common business logic that is endemic to the diverse commodity markets,

© Commodity Technology Advisory LLC, 2020, All Rights Reserved.

Addressing Commodity Market Challenges With Digitalization Enabled by Platform Technology

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providing valuable capabilities and business value “out of the box”. The company has also invested much of their development efforts in creating a library of pre-built apps and services that span commodity production, sourcing and upstream origination, trading and risk management, supply chain operations, and numerous market data interfaces.

The core platform provides embedded workflow management capabilities, data administration and security. Using the provided application development toolkit, users can access that platform via welldocumented and open APIs, providing a clear path for rapid integration with internal systems or for development and deployment of custom capabilities.

Eka’s broad library of prebuilt market & commodityspecific apps (accessible via their App Store) allows their customers to simply download and deploy new functionality as their needs change. The Eka App Store library currently lists more than 50 apps providing specific trading and risk functionality, digital supply chain management, financial management and analytics, and includes commodity-specific algorithms and workflows that address complex nuances of multiple commodities. Once an app is downloaded, customers of Eka’s flagship solution can quickly implement new functional capabilities or new system interfaces - giving them the flexibility and agility they need to address changing market conditions or to pursue new opportunities at a lower cost and faster ROI than is possible with traditional CTRM/CM products.

The Eka Commodity Platform allows its customers to achieve comprehensive integration of the end-toend global trading and commodity management process by streamlining the life cycle of transactions across orders, logistics and settlement, enabling operational and financial optimization and better management of financial risk, hedge accounting and compliance.

As companies seek to improve their competitiveness, agility and financial performance through the process of digitalization, new and innovative technologies are always compelling. However, without that technology having been developed with a deep understanding of the complexities of the markets they serve and the very specific challenges facing those market participants such as that in Eka’s Commodity Platform - the return on investment envisioned by a digitalization project will likely fall well short of its target.

© Commodity Technology Advisory LLC, 2020, All Rights Reserved.

ABOUT EKA Eka’s ETRM solution is driven by a cloud-native platform that allows businesses to manage the entire trading life cycle of Natural Gas and LNG in diverse energy markets. The platform leverages enterprise apps built for LNG and Natural Gas markets to help businesses execute extremely complicated itineraries, hedge price risk with confidence, and improve operating margins with better forecasting of Natural Gas volumes coming in and out of physical plants.

Built on a new age architecture, Eka’s multi-asset platform is built on AI rich algorithms, domain-niche analytics, and Blockchain that empower businesses to stay on top of dynamic markets by letting them

scale at will, go live on time and budget, and take data-driven decisions.

For more information, visit www.ekaplus.com

ABOUT Commodity Technology Advisory LLC Commodity Technology Advisory is the leading analyst organization covering the ETRM and CTRM markets. We provide the invaluable insights into the issues and trends affecting the users and providers of the technologies that are crucial for success in the constantly evolving global commodities markets.

Patrick Reames and Gary Vasey head our team, whose combined 60-plus years in the energy and commodities markets, provides depth of understanding of the market and its issues that is unmatched and unrivaled by any analyst group.

For more information, please visit:

www.comtechadvisory.com ComTech Advisory also hosts the CTRMCenter, your online portal with news and views about commodity markets and technology as well as a comprehensive online directory of software and services providers.

Please visit the CTRMCenter at:

www.ctrmcenter.com

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