Improving Data Aggregation and Analysis to Address Challenges of an Evolving Energy Market
The North American energy markets, influenced by both domestic and international developments, are undergoing a rapid evolution that has and continues to challenge energy commodity producers, processors, and traders. Driven by technical innovation, regulatory intervention and globalization, the changes occurring have impacted the entirety of the energy supply chain - establishing new pricing correlations, increasing operational complexities and creating new markets and trading hubs…and, by extension, created vast new pools of data and information that must be considered when formulating market strategies and trading decisions.
Despite these challenges, for those properly equipped with the tools and applications that can capture, analyze and support real-time decision making, there are any number of new opportunities to profit in this complex environment.
In this white paper we will examine the ongoing changes and the resultant challenges in a few of the most rapidly evolving North American energy markets, and discuss an approach to address those challenges through sophisticated real-time data aggregation and analytics.
Risk Monitoring & Management Trends in Commodities
Commodity producers, traders, and industrial consumers are all facing a barrage of risks such as price exposure and cyber vulnerability, as well as legal, credit, operational and market risks. The risks associated with buying, selling, and moving commodities only seem to be increasing exponentially with greater regulatory oversight and a broadening of supply chain operational issues like traceability. Many of these risks can be business killers – the actions of rogue traders or the impact of counterparty business failures, for example – and lead to fatal damage such as an inability to access capital or damage to brands (via issues around sourcing commodities or producing substandard end-products). Other risks, such as ineffective price risk management, inefficient scheduling of transportation, or regulatory non-compliance can erode profitability and damage the company’s ability to execute on strategic plans and growth initiatives.
Of course, often where there is risk, there is also an opportunity to profit - but only when those risks are recognized, effectively managed, and properly mitigated. The rise in stakeholder scrutiny and regulatory oversight also means that being able to demonstrate effective risk management across the organization is certainly more important today than ever before.
Commodity Technology Advisory LLC (ComTech), with the support of study sponsor Allegro Development Corp., undertook a snapshot survey of the industry to find out more about the types of risks faced by trading companies and to gain an indication of how and where those risks were being managed.
Supply Chain Challenges: BIOMASS
Over the last decade, biomass of various kinds has become an increasingly commonly used fuel for electricity generation, particularly in the European Union, which mandated ambitious threshold targets for the share of renewables in total electricity generation.
Wood chips and pellets have taken a large share of biomass production, not just in Europe, but also parts of Asia as well. In fact, according to the US International Trade Commission, production of wood pellets in the US for export to these locations increased 400% between 2008 and 2014 to help meet the increased demand. The US International Trade Commission further states that, “estimates of global wood pellet consumption vary, but are currently in the range of 22 – 25 million metric tons (Mt) annually. This projected to rise to between 50 and 80 million Mt by 2020. At 19 million Mt in 2013, the EU accounted for 85 percent of global consumption of wood pellets.”
This white paper examines some of the challenges around managing and optimizing biomass supply chains and discusses Generation 10’s Commodity Manager as a comprehensive software solution to these challenges.
CTRM/CM as an Architecture – An Approach to A 20-year old Conundrum
Wholesale commodity trading and risk management can encompass any number of business processes and strategies, from brokered trades in which the buyer purchases some quantity of commodity and then immediately resells it at the same point for (hopefully) a profit – to multi-commodity transactions involving global supply chains, transformations, and complex financial hedging strategies. Vendor provided software to service this wide-ranging market, commonly known as Commodity Trading and Risk Management or CTRM software, will similarly vary in possible functional coverage, with some CTRM solutions addressing specific functional components (such as deal capture or risk analysis for a specific commodity), while others will attempt to model and provide wide-ranging functional coverage for all possible commodity classes and the unique physical operations associated with each and every possible combination in between.
Given this, the Commodity Trading and Risk Management (CTRM) software category is very difficult to define except in the broadest of terms. When the term “CTRM” was first coined, it was essentially used to expand the breadth of the software category known as Energy Trading and Risk Management (ETRM). Both terms broadly mean the same thing, with ETRM reflecting software solutions that address the capture, position management and accounting for any wholesale energy trade; and CTRM reflecting a wider reach (including energy in some cases) and encompassing other commodity categories including ags, softs, and metals. In the last few years, CTRM has been increasingly regarded as a component of an even larger software category called Commodity Management (CM), further muddying the classification of the types of software that address the needs of the wholesale commodity marketplace. Commodity Management solutions are most commonly utilized in the mid- and downstream commodity markets, including food processing and packaging companies, agricultural merchants, and manufacturers. Additionally, there are a number of terms used to describe different aspects of Commodity Management such as ‘ERP for Commodities’.
The Era of ETRM in the Cloud
Commodity Technology Advisory (ComTech) has been tracking the rise of ETRM solutions delivered in the cloud over many years. While the potential benefits and cost savings associated with ETRM in the cloud have always appeared to be robust, uptake across the industry has proven to be quite slow until relatively recently. Although many other industries migrated to the cost efficiencies of the cloud, the energy industry lagged behind. The key concern quoted by the industry was usually data security, despite companies often having back-up and recovery procedures in place that result in trade and position data being stored off-site. Then, commodity prices collapsed generally, led by energy, and costs began to rise inexorably as new regulations progressively came into force. Margins were squeezed and structural changes have occurred across the industry so that profitable trades are a good deal harder to find.
While ETRM and other IT initiatives were put on hold or scaled back to reduce costs, rapid market changes necessitated ETRM functional changes – compelling energy companies to seek more cost effective ways to procure the right ETRM platform. As their ETRM and related solutions have quickly become outdated, these systems are effectively deadweight - holding those businesses back from responding to change and streamlining business processes. In this environment, ETRM in the cloud has become a popular alternative to “traditional” on-premises software given its low cost of entry, potential lower total cost of ownership and promise of cheaper maintenance and upgrades. Confirming this trend, a recent survey conducted by ComTech looking at trends in a lower energy price environment found that around 30% of surveyed European energy traders had an increased urgency to upgrade or replace their current ETRM, and that almost 50% would consider ETRM in the cloud as a way forward.
Prove It or Else - Traceability
The commodity business has always been fraught with complexity, but under increasing scrutiny from legislators, regulators, consumers, and therefore auditors, that complexity is growing steadily and inexorably. One significant challenge in which complexity is increasing, is the need to track commodities, consumables, and fuels, from source to market. It is no longer the case that buyers can simply pick the best price in choosing a supplier as concerns over issues like food safety, as well as an increasingly savvy consumer that is concerned over abusive labor practices, workers rights, and environmental issues, for example, are increasing the traceability complexity across almost all supply chains.
The recent Trade Facilitation and Trade Enforcement Act, for example, has tightened import controls into the US allowing customs to detain and seize any product thought to have been produced with child labor. The legislation has already been used to detain a shipment entering the US. In order to release a shipment, the owner is required to prove that the custom’s suspicions are incorrect. This is a good example of how a myriad of new rules and regulations are forcing commodity firms to pay much closer attention to traceability. Increasingly, the onus is on the owner of the commodity or product to prove compliance with standards for environment, labor and sustainability etc.
Next Generation Integrated Treasury and Trading for Energy and Commodity Companies
Commodity markets have always been uncertain and have often exhibited extended periods of volatility. Events such as the collapse of Enron and other marketers, the financial crisis, and more recently, BREXIT, have all had massive impact, and yet, after each event, measures have been put in place, both regulatory and in terms of controls, to protect markets, margins and profits. Each tumultuous event has brought learning, innovation and improvements in business processes. The energy industry has also learned from these experiences; adopting better and improved risk controls, systems and tools to predict, protect and profit. Yet, now may be the time to innovate once again to better protect margins amid increasing costs and lower commodity prices.
Energy producers, traders and consumers today face a challenging trading environment with more regulatory oversight, lower prices, increasing costs and almost constant volatility. As a result forward thinking energy companies are already adopting a more closely integrated treasury and trading approach, a potentially overlooked opportunity by many. Typically, trading and treasury are separate areas of business with limited or no integration between them. The traders work to sell commodities at the best price or to profit from trading, while the treasury function with its concern over available cash, navigating future investments and doing so in the right currency and at the right location, has a range of responsibilities, including FX and IR hedging, broader credit management, debt and capital management and more. Usually, the treasury department gets a fixed time view of trading positions to work with and can miss opportunities to protect profits or control costs as a result as these exposures change rapidly. Even large oil and gas majors have experienced the situation where trading has a good month but FX rates moved against them to give an entirely different result. Despite believing that they were hedged, FX markets went against the company leaving it with significantly eroded traded profits.
New Age Energy Markets - Challenges for Utilities, IPPs and Traders
The North American power and gas markets are undergoing an accelerating evolution driven by increasing regulation, new and emergent technologies, and a persistent surplus of natural gas brought about by the “shale revolution.” The transformation from a coal-centric power market to one reliant upon renewables and natural gas for baseload power generation has had profound operational and commercial implications for both the electricity and natural gas markets.
Much of the change that has emerged has been catalyzed by regulation at the federal, regional and state levels, including emissions/greenhouse gas regulation and renewable portfolio standards. These regulatory mandates have been largely answered by technology – cheaper and more efficient solar and wind generation, abundant sources of natural gas from long-reach lateral drilling and massive hydraulic fracturing, smart grid technologies that improve grid efficiency and reliability, and more efficient industrial and consumer appliances that reduce system load. In aggregate, these changes have had massive and ongoing impacts across the energy industry in the US, increasing complexity of operations and affecting the business models of many of its participants.
For power utilities, IPP’s and traders, this New Age Energy Market presents a number of challenges that must be addressed to operate profitably.
Responding To Continual Energy Market Change
The European power and gas industry is currently going through a period of very rapid change that has potentially far reaching consequences. While change is certainly no stranger to the industry, it requires players in the industry to constantly re-evaluate their business process and technology infrastructures in order to adapt and thrive. Examples of the drivers for change include:
- Changes in the regional and national political landscape in terms of both environmental issues and the overall structure of the industry,
- A host of new regulatory and governance regulations,
- Decreased profit margins and,
- Major shifts in all aspects of technology from generation to computing,
Energy companies will need to rapidly respond to these changes and this response will certainly include a review and perhaps upgrade of their Energy Trading and Risk Management (ETRM) and related software.
Deriving Business Value from Big Data using Sentiment analysis
‘Big Data’ are two small words that are widely used to describe the massive growth in data of all forms and that hold; the promise of delivering huge potential business impact. The question is, how?
Today, and increasingly in the future, businesses are surrounded by masses of data and raw information. Some of this data is very relevant but much of it is not. Further, most of that data is unstructured in the form of email, documents, images and different types of social media, blogs, and so on. Unstructured data is notoriously difficult to access and query, it is scattered across many different locations and formats, and it requires some form of preprocessing before it can be analyzed and used. Yet, it is this unstructured type data that is primarily exploding in quantity, representing around 80 per cent of the annual growth of data and doubling in quantity every two years.
A few years ago, ‘Big Data’ was just another buzzword; a fad perhaps that would eventually fade. Today though, big data is increasingly being used to provide deep insight and predictive analysis in to everything from stock market movements to individual buying behaviors. Those that are able to make use and harness the power of this disruptive force in markets will benefit by being smarter, faster and more efficient, meaning they are more likely to seize opportunities early and thereby profit. In the financial services industry, this possibility has not been lost on the banks who along with associated firms, are investing heavily in applying a variety of technologies and approaches to unlocking the value of ‘big data’.
Buy? Build? Why Not Both?
A recent survey and report by analyst firm ComTech Advisory suggests that a majority of users of ETRM/CTRM software might consider building custom software to meet their business requirements. In fact, around 70% of the survey’s respondents suggested they would consider such an option. As ComTech noted in the report, about 35% of the respondents were representatives of the top tier of the industry who have extremely complex, global, multi-commodity supply chain operations to manage. Nonetheless, given the maturing market for commercial E/CTRM solutions, the idea that anyone would chose to build a solution is perhaps surprising. ComTech concluded that especially in todays’ business environment of rising costs and diminished profits, a more appropriate solution might be to build around a commercially available solution.
This white paper examines the pros and cons of build versus buy while also examining other approaches that in the end may offer a cost effective, yet superior solution. It looks at the Brady cloud offering in particular as a potential starting point for a hybrid solution and examines why a hybrid solution may make commercial and functional sense.
A Managed Services approach to Trading IT Excellence
How Delta Energy Supports Its Best-in-Class Trading Operations
Companies that trade, or buy and sell, commodities face a myriad of complex business and technical challenges these days. One typical conundrum is often around Information Technology (IT). A trading firm is, after all, a trading firm and not an IT shop and yet, it needs to have an IT infrastructure, usually a very complex IT infrastructure, in order to conduct its business efficiently. That infrastructure will consist of hardware, networks, mission-critical applications, security, back up, recovery and much, much more. It requires a special set of expertise, both from a technical and a business standpoint, in order to maintain and continually improve it. Such staff is hard to come by and even harder to retain. Meanwhile, regulations and rapidly shifting market conditions mean that infrastructure is getting more and more complex and more and more critical. How is this problem to be tackled and at what cost?
Delta Energy is one company that has solved this problem and gained enormous benefits from its approach in doing so. When Michel Koornstra became head of Energy Trading at Delta, he inherited a very familiar problem to many in the industry. The company was using an ETRM solution that was already 6-years old. “We had workarounds on our workarounds,” he says, and that was only a part of the issue. The support requirements on Internal IT were so high and cumbersome that they didn’t have the luxury of following the ETRM software market. Day-to-day firefighting activities prevented them from utilizing their time around its ETRM software to properly support the best in class trading operation that he wanted to build.
Analytics to Address the Increasingly Complex Global Agricultural Market
There is no single market for agricultural and soft commodities – each commodity has its own unique value chain and combination of production methods, processing/transformations, and consumption patterns; the combinations of which any particular commodity can, and in many cases will, vary significantly by geography.
Prices for these commodities are influenced by weather, input costs (seed, fuel, fertilizer, equipment and labor), changing consumer lifestyles, wealth distribution (both globally and within individual countries), currency values, interest rates, regulations (including impacts of GMO regulations), subsidization, and emerging technologies (such as bio-fuels). Where any particular enterprise falls within the value chain from producer to consumer, the influence and impact of any one or more of these factors will vary.
With the majority of agricultural and soft commodity wholesale prices at or near 5 year lows, and the outlook projecting more of the same, almost all market participants are facing significant challenges in maintaining profitability. From producers to processors, any company that operates in the ags and softs market must remain vigilant and constantly adjust to these rapidly changing market conditions, including uncertainty driven price volatilities, in order to ensure a profitable operation.
CTRM for Sugar – Managing Sugar’s Complexity
Sugar is produced in more than 120 countries and global production is now more than 174 Million tons a year. Approximately 70% of this is produced from sugar cane, largely grown in tropical countries, and the remaining 30% is produced from sugar beet, a root crop grown mostly in northern temperate zones. The primary use and market for sugar is the food industry, as sugar is used as a sweetener, preservative, texture modifier, fermentation substrate, flavoring and coloring agent, bulking agent and to add decoration to food items, such as cakes.
This paper looks at this important commodity in terms of its supply chain, markets, price formation and most importantly, unique functional requirements in a CTRM solution. While there are many CTRM software solutions on the market, there are many fewer that can truly handle the unique aspects of sugar trading. The paper identifies the unique characteristics of sugar trading and sugar trading that needs to be included in a sugar-focused CTRM solution.
Evolving CTRM in the Cloud
CTRM in the cloud was arguably innovated by Aspect (then as OILspace) when it started to deliver data and ETRM software over the Internet using a web browser 15-years ago. The company found a niche market for its software delivered ‘in the cloud’ and has continued to innovate cloud delivery of CTRM software ever since. Over that 15-years, much has changed in terms of technology, including the understanding and acceptance of the cloud, as evidenced by the recent ComTech Advisory research project into CTRM in the Cloud1. Against a backdrop of rising costs and decreasing margins and a requirement to comply with a variety of regulations, CTRM in the Cloud has found a broader appeal in a cost-conscious market and is rapidly gaining ground. Indeed, almost any CTRM vendor will now offer its solution ‘in the cloud’ if asked and a number of other vendors have adopted the cloud model of delivery as their primary focus.
As acceptance of delivery in the cloud has strengthened, so too has appreciation of what the model can actually offer. Users desire greater choice and control in many areas of their business and the technology and service innovation associated with cloud delivery of software generally has brought this to many areas of the business. This would include the ability to pick and chose service offerings and just who manages those services, a variety of attractive hosting models that range from implementation in the public cloud to the customers’ cloud and increased choice in payment options for those services. Cloud strategies are now impacting many IT and project decisions across every area of the business.
As of the end of 2013, when ComTech was undertaking the research for its definitive study, broad deployment of CTRM in the cloud had not occurred and only around 16% of those responding to the study’s survey stated that their CTRM was delivered in the cloud, but more than half stated that it was a consideration in their on-going procurement projects. Since then, we have observed strong growth for the deployment model. However, there remains stoic resistance to CTRM in the cloud in some quarters of our industry. This paper will briefly examine the current state of CTRM in the Cloud and focus on its continued evolution and adoption in the industry.
The Importance of Price Curve Management In A More Regulated Commodity Trading Environment
In an era of significantly tighter regulation and oversight of commodity markets, forward price curves have taken on a whole new level of importance. Internal and external auditors, as well as regulators, want to be certain that the valuations used to build up financial statements are irrefutable and truly represent fair value based on reliable data. Indeed, several of the regulations now in force also call for increased and better documented risk management processes, including mark-to-market and profit and loss calculations.
Increasingly, funding banks and shareholders also desire increased transparency into risk management for assurances and forward price curves are central to that function. No matter how good the risk management systems are, it is the data that they utilize that is key to good risk management, and market pricing is a key ingredient in that data. Furthermore, the forward curve requirements don’t just impact commodity trading and hedging operations, but also the treasury function.
In a previous paper, Commodity Technology Advisory defined forward curves and looked at their uses and the source of the forward curve data in some detail. In essence, forward curves have three major uses.
Ensuring E/CTRM Implementation Success
An energy/commodity trading and risk management (E/CTRM) system implementation project is the structured process of taking a newly acquired E/CTRM software product from delivery of code to full “in production” use, and in the process, meeting the business needs that precipitated its purchase.
Implementing an E/CTRM system shares many of the complexities involved in implementing any other enterprise-scale IT system. It requires a comprehensive plan, solid leadership (both executive and project management), specialized technical and business expertise, and a commitment from the software vendor to provide the necessary support to make their new client successful.
However, E/CTRM solution implementations are further complicated by the fact that the E/CTRM product operates not only as the system of record (that is, the system that records, maintains, and accounts for transactions), but it also provides capabilities for managing contracts, trades/deals, logistics, position management, risk management, and associated analytics. A comprehensive E/CTRM system is designed to be a singular system that provides energy and commodity trading organizations the depth and breadth of the highly specialized functionality their businesses require. As such, E/CTRM systems are extremely complex and require detailed knowledge of the business combined with a deep understanding of the software capabilities to properly implement. ComTech Advisory’s experience and research suggest that the effort required and the risks involved in implementing and integrating a sophisticated, configurable enterprise-scale E/CTRM solution are of ten poorly understood by the client and may be minimized (though not necessarily intentionally) by the software vendors during the sales process. Underestimating the real costs and project risks can quickly turn what would otherwise be a “bargain” software package into a long-term, costly headache. All things being equal, when it comes to E/CTRM software, the lowest priced solution may not necessarily be the right solution.
Addressing the Decline - Finding the Silver Lining for Producers
From around 2005 to early 2014, the revolution in North American oil and gas production, spurred by the development of long reach horizontal drilling and massive hydraulic fracturing technologies, attracted billions of dollars in new capital to the space – fueling huge growth in drilling activity, oil and gas production, and in the numbers and size of oil and gas producers operating in the space. However, with the sudden collapse of oil prices (beginning in the third quarter of 2014, which saw the value of crude decline by more than 50% from its high in July of that year), the inflow of capital has shrunk, and with it, the expansive growth in the producer market. While the collapse in the oil markets has had far reaching impacts across the global economy, nowhere are the consequences more greatly felt than in the North American oil and gas fields.
With this low price environment extending for almost a year now, US and Canadian producers have slashed drilling and exploration budgets and are cutting costs to preserve cash in order to ensure their survival. Companies that had principally relied on debt financing to support their drilling activities have been particularly impacted and many are struggling to meet debt payments, forcing liquidation of assets as bankruptcies loom. The upstream market is seeing the beginning of a wave of mergers and acquisitions as the stronger producers, those that funded their activities through generated cash or retained earnings, are now looking for bargains amongst the weaker.
European Power Markets in Transition
With European energy markets in transition, all market participants now face a number of potentially tricky challenges. A combination of EU initiatives, increasingly invasive regulations and a backdrop of falling and less volatile commodity prices, have precipitated an era of change and uncertainty in which there are fewer trading opportunities and profits are harder to come by.
Analysis of the trends and issues impacting European energy markets strongly suggests that these markets are becoming increasingly asset-centric and that the winners will ultimately be those companies that can utilise their assets most effectively. Powel thrives in helping companies extract more value from their complex energy assets and portfolios using its expertise in optimisation, modelling, logistics and trading and is ready to rise and respond to these challenges.
Value Study: Investing in E/CTRM in Turbulent Times
The only constant is change echoes an astute observation by the Greek philosopher, Heraclitus, some 2,500 years ago. Those of us who are engaged in the world of commodities are continually reminded of the accuracy of his observation, particularly recently, as commodity prices collapsed led by crude oil. In fact, our industry is continually impacted by changes in the regulatory environment, supply/demand balance, global economic environment, technology developments, political intervention and more.
Recently, BP noted in its annual Energy Outlook1, “Today’s turbulence is a return to business-as-usual. Continuous change is the norm in our industry. The energy mix changes. The balance of demand shifts. New sources of energy emerge, such as shale gas, tight oil, ultra-deepwater oil or renewables. Economies expand and contract. Energy production and consumption are affected by disruptions, from wars to extreme weather. New policies are created to address climate change or bolster energy security.“
Change is the very lifeblood of the commodity trading world, creating opportunities for profit for those who are swift and responsive enough to act. Good traders make money in up or downwards moving markets, provided they are armed with up-to-the-minute data and the analytical tools needed to identify, analyze and manage their trading decisions. However, depending on market direction, other market participants might be caught in a more problematic situation and experience cash flow and/or profitability issues should price movements undermine their naturally long (producers) or short (consumers) positions. Nonetheless, if the company has the right tools at its disposal to track up-to-the-minute changes, and properly and effectively manage its exposure to those changes, then value can be protected and in some situations, profits might be made.
Managing Forward Curves in a Complex Market
Any company that owns commodities, either through production or merchant activities, needs to know not only the current value of those commodities based on market prices, but also needs to develop a view of the future value of those commodities during the time that they are projected to be held in inventory. Additionally, agreements to purchase commodities in the future must be accounted for, not only at their agreed or projected purchase price, but also during their anticipated holding period.
Commodity prices are constantly changing and are driven by market forces that are virtually impossible to predict with any degree of certainty. As such, accurately forecasting costs and price exposures is difficult at best, and particularly so now, given the rapidly changing supply and demand patterns that define the global commodity complex. Huge growth in demand for all commodities in Asia, the rapid rise of agricultural exports from developing countries in the Asia-Pac region, and the shale revolution that is driving unprecedented growth in US oil production, are all examples of the new dynamics that have fundamentally altered price formation in markets around the world. In this globalized and increasingly interconnected market-place, which is being constantly buffeted by economic uncertainty, predicting future prices is more difficult, but perhaps more important, than ever.
Commodity Management and ERP
Over the last several years, the phenomenal growth and expansion of wholesale commodity trading has begun to have a significant impact on both business practices and strategic thinking across commodity supply chains. Producers and processors of raw materials (commodities) and sellers of finished goods that rely heavily on commodity feed stocks have had to come to terms with a business environment of generally increasing and significantly more volatile prices for their raw materials. Despite some weakening in commodity prices on the back of a stronger dollar and increased supply recently, volatilities remain problematic and in the longer-term, prices will continue to increase as the global population continues to grow and as more of that population become consumers of goods.
Recently, many of the larger banks have begun to exit commodities trading under fire from various regulators and a set of new regulations. Their position has arguably been taken up by large commodity trading firms, with companies such as Glencore, Mercuria, and others expanding their operations and filling much of the liquidity vacuum left by the exit of the banks. These large commodity traders have also experienced much thinner trading margins and have increasingly sought to secure physical commodity supply by purchasing producers and their assets in order to de-risk a portion of their supply chain. In the future, the boundary between producer and trader may be increasingly blurred.
Is Now the Time for Open Source in CTRM
In this ComTech Advisory White Paper, we take a look at the concept of Open Source software in commodity trading. In doing so, we are asking the question, why has this approach not yet been tried? And if it were to be tried, would it help? The white paper is really designed to foster debate around the topic as opposed to take a stance on the issue one way or the other. Acutely aware of the many challenges facing both users and vendors in this fast moving and complex business, ComTech Advisory is always interested in pursuing research into how technology adoption might be improved. The question posed by this white paper is simply this – Is now the time for Open Source CTRM?
Here we are in 2014, almost 20-years after the ETRM and later, the CTRM, software categories were ‘invented’ and in some ways, very little has actually changed. Yes, there has been some vendor consolidation, but for every vendor and solution that has been acquired or gone out of business, at least one new supplier has consequently emerged. We seem to have been writing that ‘there are over 70 vendors of E/CTRM software’ for the last 10-years at least and it’s true – there really are that many in the CTRMCenter software directory. In fact, we have found and added 3-4 new ones this year alone!
Taking the Next Step in CTRM Cloud Solutions
In the last decade, a quiet revolution has occurred within the E/CTRM (Energy/Commodity Trading and Risk Management) software category as vendors and users have increasingly adopted the cloud-computing model. This move has been driven by demand largely for more affordable E/CTRM software as reflected by a lower total cost of ownership. Increasing regulatory and shareholder scrutiny has meant that even smaller commodity traders need to abandon spreadsheets and similar unstructured and difficult to audit tools in favor of more robust solutions. However, even the smallest of commodity trading companies has pretty broad and complex requirements meaning that they actually still require a fully-fledged application to meet their needs, but one that fits within a budget that reflects the size of their business.
In recent years, consumer and business cloud-based applications have begun to catch on and that familiarity does seem to have benefited the E/CTRM in the cloud market as well, as customers are now much more familiar with the benefits than they were 5 years ago. It is important to note that it’s not just the smaller commodity traders that see the potential benefits of a cloud-based solution either. Recent ComTech research suggested that, in general, all buyers of E/CTRM software are increasingly open to considering alternatives to the traditional “on premises” implementation model. While a small, but committed, minority continue to resist anything but the traditional on-premises implementation approach, the overwhelming majority of respondents will consider cloud deployment for a variety of vertical application areas in and around commodity trading.
Uncertainty is Clouding the Energy Trading Outlook
As the United States continues to rapidly grow its production of oil and gas from shale, and Canada increases production from its oil-rich tar sands, these new volumes are helping to support world oil markets as crude production outside the US declines due to increasing conflict in the Middle East and North Africa. Should these conflicts widen, the global markets will be increasingly volatile as supply disruptions outpace the growth in North American production.
Though US natural gas production has not yet impacted the global market space via LNG exports, there is no doubt that those exports will happen. While the impact on US prices is unclear at this time, these exports will be yet another variable with which to content in a US market already unsettled by increasing regulations that will, by design, reshape the US energy mix.
Dealing with this uncertainty will require increasing market vigilance, with a constant view on both the near and longterm energy outlook, and supported by a commodity trading and risk management solution that facilitates analytics, market visibility and regulatory compliance, such as Eka Energy.
What Does Tomorrows CTRM Look Like?
The $1.6 billion Commodity Trading and Risk Management (CTRM) software category continues to change and evolve rapidly, driven by the many and varied issues that those in commodity industries face. Today, the CTRM software category is being forced to move from one that is mostly about managing trading transactions after the fact (capturing volume and price, managing the delivery and then producing an invoice), to something dramatically different.
Multiple issues now face those operating in the commodity industries and the confluence of these issues is driving many of the changes in CTRM software. For those who need to manage physical commodities and their supply chains, the issues are magnified further due to the complexity of tracking and managing those physical commodities with stock, quality characteristics, paperwork, movement and much more. There is more data, more regulation and more risk. CTRM software must incorporate much more functionality to support the modern supply chain.
Making more of data using ai
Commodity traders now have access to a wide and increasing number of data sources and significantly larger volumes of data of all types. New regulations such as REMIT, for example, that are designed to increase market transparency and reduce possible market manipulation, ensure that many more new types and sources of important data are now generally available. A recent proprietary survey conducted by ComTech Advisory on behalf of DataGenic1 concluded that for around half of those surveyed, the volume of data they have to deal with has almost doubled over the last two-years. Commodity traders will need to cope with and manage, an ever-increasing amount of data in the future.
Social media has also become a very popular medium over the last several years and arguably, it is increasingly a relatively untapped source of potentially useful intelligence for commodity and other traders. Social media outlets such as Twitter2 and the blogosphere are increasingly being utilized in other asset classes to provide traders with trading indicators and sentiment analysis. However, can social media really have any value for commodity traders and how are useful signals to be extracted from among all of the daily noise from such sources?
RPS and RECs - Managing an Increasing Regulatory Burden
Renewable energy certificates or ‘RECs’ have become the currency of the renewable or green power industry, allowing power providers to expand their product offerings and offer ‘green’ power irrespective of whether or not they can physically generate it. Consumers can also be assured that should they choose to buy renewable power, in support of the renewables suppliers servicing the market, that the power they use has either come directly from a renewable generator, or if a renewable generator is not servicing their facility, that it is offset in the market by power from a renewable source, such as wind, solar or hydro, in another geographic area.
Essentially, as described by the US EPA, a “REC represents the property rights to the environmental, social, and other nonpower qualities of renewable electricity generation. A REC, and its associated attributes and benefits, can be sold separately from the underlying physical electricity associated with a renewable-based generation source.”1 It is the separatability from the underlying physical electricity that actually creates the value and benefits for both the producer of green power, whose investment is supported by selling RECs, and consumers who wish to enjoy the benefits of green power but who may not have direct access to renewable power due to their physical locations.
The Evolution of Smart Commodity Management
Over the last twenty or more years, global wholesale commodity markets have grown and evolved substantially and in the process, a sizeable new software category has been established. That software category is widely known as Commodity Management (CM) software and, at the highest level, it can be defined as those software applications, architectures and tools that support the business processes associated with managing commodities. CM software therefore comprises a broad set of functions that can vary considerably depending on which commodities are traded, what assets are employed in the business, where those assets are located, and what the nature of the company’s business strategy and associated business processes. CM software continues to evolve quite rapidly in lockstep with the industry. In past years, CM focused squarely on trading and risk management as CTRM software, but in recent years it has been extended into the supply chain with solutions such as shipping and stockyard bulk handling, for example.
As the software category has evolved, so has the volume and nature of the data that the software captures, manipulates and stores. Today, big data is an increasingly important aspect of the commodity management world as vast quantities of many types of structured and unstructured data potentially hold the key to profitability and even survival of companies that sell or purchase commodities and raw materials. As a result, the requirements that users place on CM software are also changing from essentially an after the trade recording and reporting system, to one that provides real intelligence and value back to the business.
Consumer Product Companies Smart Commodity Management
Rapid global population growth combined with increasing urbanization is driving demand for raw materials of all kinds. By 2030, it is estimated that there will be 1.4 billion middle class consumers in China compared to 365 million in the US and 414 million in Europe1, placing increasing strains on the supply and distribution of raw materials and finished products. For the last five or more years, commodity and raw material prices have been extremely volatile, in part due to supply/demand tightness, and this paradigm is one that is set to continue in to the future. For consumer product companies, these facts represent a significant challenge and risk to their businesses.
Consumer product companies, faced with volatile raw material and energy costs on one side, and price conscious customers willing to shop around on the other, have sought ways to minimize these risks. They have stripped costs and inefficiencies from their supply chains and businesses and, in some instances, radically overhauled the way in which they manage the procurement and planning functions in favor of a commodity management approach. Commodity management means approaching price exposure more like a trader tracking price movements, utilizing hedging and other risk mitigation tools and measuring performance against market as opposed to budget or forecast. Some companies have deployed commodity management software, fully integrated with their ERP and other systems, to manage supply chain price exposure.
Next Generation CTRM
Commodity markets may well now be at an important crossroads in their evolution. Always risky and intricate, trading, procuring and/or selling commodities, is increasingly more complex and becoming even riskier. For those engaged in commodity markets, there has always been a need for flexible and configurable CTRM software to cater for the rapidly changing nature of the business. Unfortunately, most traditionally implemented on premise CTRM software solutions are suboptimal in terms of keeping current with new business challenges. Often the solution also carries a high cost of ownership as this traditional development model can mean months, if not years, between the emergence of a new requirement and the delivery of the matching functionality. New models are now emerging that utilizes the Cloud from new vendors who, familiar with such issues, have innovated different approaches that hold much promise for users. This white paper examines how the industry is changing and why legacy CTRM software and the traditional models of development, implementation and support are problematic for users. It reviews the emergence of new technologies and delivery mechanisms and contrasts how these solutions may prove to be more responsive to industry needs in the future.