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WHITEPAPER

CASH-RICH ENERGY AND TRADING FIRMS MOVE INTO METALS

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A ComTechAdvisory Whitepaper

Cash-Rich Energy and Trading Firms Move into Metals

INTRODUCTION Over the last few years, as commodity prices and volatilities have exploded, many trading firms made large amounts of money. Amongst them were oil companies and some of the world’s largest commodity trading firms. Seeking areas to invest this excess cash has resulted in one of many new trends seen in the energy & commodities complex in recent years as they purchased assets across the space. This has meant that oil companies and commodity traders have often purchased assets in the broader commodities space and specifically in metals and mining. Vitol Group, Gunvor Group and Mercuria Energy Group are among the traders building out their metals teams, as they look to capitalize on record profits. Meanwhile, the energy transition and electrification has increased the focus on the supply of many different types of metals from base metals like copper and battery metals as well as precious metals like gold that are utilised in circuitry. For oil companies and even some power-focused traders, utilities and generators, the excess profits and the new link between energy and metals has meant that increasingly they have looked at the new opportunities in, and synegy with, metals. For example, Gunvor brought in a seasoned concentrates trader recently and had also built up a group of Aluminium traders according to industry sources. Vitol has also moved in Aluminium markets. Indeed, according to an article published by Mining.com1 last spring, Ivan Patev, global head of base metals at Gunvor said “As a company, what we’re

really doing is continuing our deep involvement in energy markets. The energy transition goes through metals — you cannot do it without metals.” A point apparently echoed by Vitol’s CEO, Russel Hardy according to that article - “The bigger, commoditized

metal markets are probably more suited to us 1

because most of what we do is large scale commodity movements. So lithium, cobalt or other battery metals hasn’t really crossed our thought process.” What this means is that metals have taken on a new and enhanced significance due to their linkage with electrification and the energy transition being actively promoted by politicians in areas like the E.U, parts of the USA, and elsewhere. Energy firms must now acknowledge that the link between energy and metals is both an opportunity and an exposure that can be managed and potentially profited from, and many are actively pursing this approach. With the continued addition of distributed renewables and batteries, this is expected to be a trend that will continue and that will impact many metals from rare earths to copper and gold. Many of these metals are expected to show shortfalls versus future demand. However, those energy firms who do start to dip into metals markets – particularly physical metals - soon discover that their Energy Trading and Risk Management (ETRM) systems lack many of the functions and features needed to successfully trade, move and/or manage metals and ores.

World’s biggest energy traders are returning to metals markets, Mining.com, April 2024.

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Cash-Rich Energy and Trading Firms Move into Metals

ETRM AND METALS – CAN IT WORK? While the ETRM is a subset of the Commodity Trading and Risk Management system software category, an ETRM – particularly one designed for electric power – will lack many elements of functionality required to trade metals – particularly physical metals and ores. In fact, it will fall short in many areas from contract management, through pricing, invoicing, shipping and logistics to risk. This means that any energy firm eyeing an entry into metals must determine how it will handle those activities and whether its current ETRM might be extensible enough to cope. The degree of gap between an ETRM and its use for metals, concentrates or ores will vary significantly depending on what type of energy commodities the ETRM was designed to support. An ETRM designed to support liquid hydrocarbon trading will be a closer fit to requirements – although still lacking considerable functionality – versus one built for electric power, for example. Some oil companies may be tempted to utilise their ETRM for liquid hydrocarbons for some aspects of any physical metals business, especially if those activities are small, but it will soon encounter serious issues and challenges. In reality, it is likely that a new CTRM or commodity management solution will be required to support any metals trading and movement activities. Some of the potential deficiencies of ETRM solutions when applied to metals and ores include significant functionalities like the following; • Lack of support for London Metal Exchange (LME) requirements – any firm trading on the LME has to handle many specific LME requirements including warrants, specific pricing, deliveries, and matching/ clearing processes and much more that are usually

only available in a metals CTRM. The LME is also a physical-settled market, so physical inventory, in the form of LME warrants are delivered against any position which is not closed before the prompt date. Warrant deliveries also occur on other metals exchanges such as COMEX and SHFE, • Many base metals contracts also reference LME market prices. The LME operates unlike all other futures markets, with a rolling 3-month price as the reference price and daily prices quoted out to this point. Prices are generally quoted as spreads over this 3-month price, or daily contango/ backwardation. This is problematic for systems designed for monthly futures contracts, • The LME also quotes metal contracts in multiple currencies, and physical contracts may use these quotes in currency, or the LME price in USD combined with a different FX index to establish prices over a period, • An added complexity is around the management of precious metals. Precious metals are managed in part like currencies – their forward curves and risk are driven by interest rates and metal lease rates, and unallocated metal forms an account balance

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Cash-Rich Energy and Trading Firms Move into Metals

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like a currency, but when different grades, forms or locations of metal are taken into consideration, or when metal is traded on an allocated as well as an unallocated basis, it becomes essential to manage the metal as a physical commodity too, Precious metal may also be leased – which is a transaction type uncommon in other commodities, which requires particular treatment in terms of accounting accruals, MTM, position management and allocation to physical metal, as well as adding the requirement to differentiate leased inventory from inventory owned outright, Dealing with the phyical commodity – each ore, concentrate or metal has specific physical properties that must be tracked, managed and catered for. This includes specific pricing attributes and details regarding how such metals must be stored or can be shipped, In fact trading in metals takes place under very different terms to most energy commodities meaning that contracts can be extremely complex, loaded with optionality and specific terms that impact price, penalties, premiums and delivery, Physical contracts may be delivered over multiple locations and shipments may be transported in stages via multiple methods – for example truck, railcar, ship, tracked using a variety of title documents Ores, concentrates and even some metals are priced according to specific quality attributes that must be tested via assay or chemical analysis along the way from sale to delivery. These attributes can change over the course of the journey, or in storage, impacting pricing, penalties and premiums. Managing the expected content and provisional and

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final assays of multiple shipments which may be split and blended over the life of a contract requires dedicated and specific functionality. The pricing of these contracts is also massively varied. Pricing terms such as price participation, escalators, and contractual terms relating to penalties, or rules on when assays need to go to third-party umpires and when and how to apply these third-party assays are extremely complex and often change from contract to contract. Managing these is essential to getting accurate invoices but also an accurate picture of mark-to-market and risk on the contract, Invoicing and price fixation take place at different moments in the trade and movement of the commodity often resulting in several estimated invoices and a final invoice over the course of the life of the transaction, The logistics side can also be very complex with multiple modes of transport, third parties to deal with (shippers, insurers, agents and so on), costs to estimate, actualize and track, and significant operational risks to manage, Other parts of the supply chain also need to be managed effectively for metals, ores and concentrates such as inventory, processing or conversions like tolling, blending, refining and so on, Traceability is also increasingly a requirement so that shipments can be tracked from source to delivery including across potentially several types of transportation, FX exposure and hedging requirements are often more complex as shifting metal contents based on assays can and do occur and FX systems cannot

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Cash-Rich Energy and Trading Firms Move into Metals

account for allocated vs. unallocated metal or metals-specific hedging strategies such as forward contracts or metal leasing. These are just some of the more major functional gaps that are likely to be seen between an ETRM and a CTRM or Commodity Management solution for metals.

In detail, there are many more potential gaps and omissions particularly for an ETRM designed to trade electric power. Plainly, companies moving into metals trading from any part of the energy complex are likely to face significant challenges and even require a new CTRM to manage their metals business.

THE NEW WORLD OF TRADING REQUIRES AGILITY A further set of issues faced by any energy company getting into metals will be the increasing impact of geopolitics on its operations. Operational risks and exposures are magnified via sudden shifts in policy like tariffs, sanctions and regulations. Supply chains face unanticipated disruption from issues like wars and terrorism as well as from sanctuons, tariffs and regulations. Many parts of the world are increasing regulations around sustainability, salvery, child labor, deforestation and so on coming up with sometimes hastily drawn up legislation that has consequences for those conducting international trade. This means that whatever solution is used to manage trade, risk and movements, it needs to be agile and well supported to ensure that shifts and changes in business practice can be implemented. Likely, it needs to include workflow, audit trailing, traceability and other features to ensure compliance. From a risk management standpoint, it needs to have strong support for stress

testing and what-if analysis to allow the true impact of events to be understood rapidly. This adds up to quite the set of requirements that are unlikely to be supplied in most ETRM solutions even with the addition of workaround spreadsheets and other ad hoc tools.

A ComTechAdvisory Whitepaper

Cash-Rich Energy and Trading Firms Move into Metals

SO, WHAT’S THE SOLUTION? For most energy companies and/or traders looking to enter physical metals, the ETRM they have been using is unlikely to cope with their new line of business. An ETRM for liquid hydrocarbons might be useable with significant workarounds but an ETRM designed for power and/or gas is a non-starter. It’s design for daily or sub-hourly markets, lack of a supply chain and logistics, mean it’s a non-starter. The solution is to procure a CTRM designed for metals specifically to insure that there is a high degree of fit to requirements. The next step is to see how that can be integrated with an ETRM in such a way as to at least allow consolidated and aggregated risk reporting, for example. In fact, the market for CTRM’s designed for metals, ores and concentrates has grown considerably in recent years with a growing number of viable solutions now available from a number of different vendors. Like any CTRM market, each solution has been designed for something specific – base metals, precious metals, concentrates and so on – initially and then expanded upon customer-by-customer. So care is required to

ensure that the correct solution is identified. While many of the solutions are relatively new and may not be as complete with respect to functionality, Quoreka has historically led in this category offering solutions with a rich depth of functionality, broad church of users and the experience to support its software globally.

A ComTechAdvisory Whitepaper

Cash-Rich Energy and Trading Firms Move into Metals

QUOREKA’S PROVEN METALS SOLUTIONS CAN BE INTEGRATED INTO AN ENERGY LANDSCAPE Quoreka has a longtime reputation for being the leader in metals CTRM - established in the ComTech vendr perception study that we prepare every two years to gauge the market’s perceptions on various categories of leadership. Quoreka knows that metals trading brings many unique challenges that ETRMs or FX platforms just can’t support. It knows that to succeed in today’s metals market, you need to: • Understand revenue timing and cost per trade • Manage logistics across global, multi-modal supply chains • Integrate pricing with LME, COMEX, or market benchmarks • Monitor risk in real time across price, currency, and credit exposures • Maintain transparency across inventory, settlement, and accounting Quoreka’s proven Metals CTRM can integrate into your existing energy tech stack, enabling expansion into metals without compromising your current operations. It

has recognised the trend for energy companies to look into metals trading and responded. It’s Metals CTRM is purpose-bult for base and precious metals trading providing real-time visibility into trading, logistics, and risk, and compliance readiness for metals-specific regulatory frameworks. By adopting a true metals solution like that offered by Quoreka, many business benefits can be obtained including the ability to maintain profitable margins, reduce operational risk, protect your reputation and manage compliance. In fact, an ETRM is really a nonstarter for metals and while the bond between energies and metals grows ever stronger, so do the opportunities to profit and trade these two synergistic commodity groups. The answer is to procure a true metals solution with a legacy expertise and proof of applicability.

A ComTechAdvisory Whitepaper

Cash-Rich Energy and Trading Firms Move into Metals

BOX - KEY OF THE QUOREKA SOLUTION Trading • Capture complex purchase/sales contracts with configurable pricing terms • Calculate valuations using real-time market data from LME and others • Manage multiple fiscal entities and automate GL postings • Track broker commissions, MTM, and deal P&L • Operations & Logistics • Manage multimodal shipments, vessel chartering, and freight documentation • Link transport to contracts for accurate cost allocation and delivery tracking • Monitor delivery obligations and generate associated documentation • Coordinate logistics workflows to minimize risk and delay

Risk & Finance • Perform real-time MTM analysis across FX, price, and credit exposure • Reconcile provisional and final invoices with precision • Conduct profitability analysis by location, product, or counterparty • Maintain sub-ledgers for payables/receivables and automate period-end close Trade Finance & Compliance • Generate and manage trade finance instruments like LCs and bid bonds • Track utilisation and costs of credit instruments • Enable audit-readiness through complete transparency and role-based access • Comply with international standards for physical delivery and traceability

ABOUT QUOREKA Quoreka is one of the global leaders in Commodity Management solutions for agriculture, energy, metals, mining, and manufacturing industries. Quoreka offers one cloud platform for procurement, trading and risk management, supply chain, sustainability and treasury. Quoreka’s functionally rich cloud platform provides industry specific automated workflows, 50+ applications and advanced analytics across the trading life cycle for various commodities. The platform can be seamlessly connected to external systems using the 65+ pre-built connectors to enable faster implementation. Quoreka’s cloud platform provides companies the adaptability to overcome complex challenges in trading and risk, supply chain, business collaboration and financial management.

With over 400 employees, Quoreka supports more than 100 customers globally. Eka credits its proven expertise in helping customers achieve digital transformation to its team’s commitment to solving challenges in an environment of continuous change. Read more at www.eka1.com Analytical and operational solutions to navigate complex, volatile markets.

ABOUT Commodity Technology Advisory Commodity Technology Advisory (ComTech Advisory) is the leading analyst organization covering the Energy and Commodity Trading and Risk Management (E/CTRM) and Energy Transition technology markets. Led by Dr. Gary M. Vasey, along with affiliate analysts Dr. Irina Reitgruber and Kevin Mossop, ComTech Advisory provides invaluable insights, backed by primary research and decades of experience, into the issues and trends affecting both the users and providers of the applications and services that are crucial for success in markets constantly roiled by globalization, regulation and innovation. For more information, please visit:

www.comtechadvisory.com ComTech Advisory also hosts the CTRMCenter and the ETTCenter your online portal with news and views about commodity / energy markets and technology as well as a comprehensive online directory of software and services providers Please visit the CTRMCenter at:

www.ctrmcenter.com Please visit the ETTCenter at:

www.ettcenter.com

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