Now is the time to digitise the commodity value chain

The commodity value chain

Read the full feature from Paul MacGregor, Head of Sales and Marketing, in Software World’s March Journal

As the world continues to adapt to virtual and remote working with severe restrictions on travel, many businesses are considering the analogue nature of how they have been interacting with customers, suppliers and intermediaries, and whether it is fit for the ‘new normal’.

Consider the metals value chain; from mining to processing, fabrication, transportation, storage, consumption and eventually recycling. Some larger players in the industry have successfully purchased or acquired the next ‘vertical’ within the chain, and hence reaped the efficiencies. However, the vast majority of businesses are dealing with intermediaries – often with business relationships dating back many years – to advise them on who, when and how to sell their products. In some cases, pricing for widely used metals (such as copper and aluminium) can be referenced from recognised Exchanges like the London Metal Exchange or Shanghai Futures Exchange – but what about the ever-growing universe of ‘rare earth’ metals for which there is no recognised public source of pricing, but which form an essential part of mobile technology, computer chips, and rechargeable batteries? Or the pricing of lithium, an essential ingredient in EV car batteries? In this case, the supplier is totally reliant on that limited analogue network of intermediaries and buyers built over a number of years.

Let’s look at another issue facing the commodity value chain: logistics and the carbon cost of transportation. Suppliers of ‘dry bulk’ cargoes typically use intermediaries, or shipping brokers, to source vessels to transport their products to the point of consumption. China, a voracious consumer of every commodity from soya beans to iron ore over the past 20 years, is often the final destination, but the cargo may originate from North America, Brazil, Chile, Australia, or any number of African nations. Shipping brokers (and other independent start-ups) have made some attempts to augment what has traditionally been a very analogue market with some digital offerings, utilising tracker beacons which are active on all major vessels.

However, there is no independent spot carbon ‘exchange’ which can identify the most efficient means of transportation to reduce the overall carbon footprint of the supplier. This is an issue which will heavily impact all energy intensive businesses as the world moves toward net zero.

The potential for digital solutions

Digital Business to Business (B2B) marketplaces are trusted to transact literally billions of dollars’ worth of goods every year in a wide variety of industries – from vehicle sales, leasing and re-leasing, to insurance portfolio re-balancing, luxury items, and cattle. Why not the multi-billion-dollar global market for physical commodities? B2B markets can widen the distribution networks of sellers, create competitive tension and liquidity in the marketplace, and enable price discovery through the use of various auction methodologies. Digital markets can capture every activity of potential buyers, including lots searched or browsed, bids submitted, and lots won or lost.

Over time therefore, B2B markets can be overlain with data science in the form of machine learning, in order to recommend the right products to make available to the right buyers, at the right time, ensuring sales teams are operating in the most effective manner. Recommendation algorithms can be extremely powerful to the marketplace owner, enabling you to adjust your auction methodology to the most appropriate for any given product, based on past auction performance.

Recommendation algorithms can also alert your buyers to potential substitute products, ensuring you sell the maximum amount of product, and satisfy your customer demand. Effective use of data science can deepen and broaden your knowledge about your marketplace and the wider industry, putting you in a position which cannot be easily disrupted by competitors.

In addition, digital B2B markets can be integrated with logistics and storage solutions, searching and securing the most appropriate and lowest carbon footprint form of transportation to the point of storage, and eventual consumption.

Making the decision to ‘disrupt’

So why has the global market for physical commodities remained analogue for so long? This is especially interesting given the scientific advances made in the mining industry, for example, utilising automated drilling and tunnel boring systems, autonomous vehicles, and drones. Or indeed, the scientific advances in agriculture, utilising robotics, temperature and moisture sensors, aerial images and GPS technology.

The answer is that this is due to a mix of two factors. Firstly, prior to the pandemic, face to face sales in high value bulk commodities was a traditional, common practice. Think of metals week in London, or copper week in Shanghai, physically bringing together the world’s largest consumers, suppliers and brokers. Both events (and many others) were cancelled for 2020, and, if they return in 2021 or 2022, it is likely to be on a vastly reduced, socially distanced scale.

Secondly, referring to my first point in this article, the current crucial role of intermediaries is naturally threatened by a digital offering. There is therefore built-in inertia to transform the sales process within the industry. More transparency in a digital B2B market and associated logistics solution would naturally narrow spreads and squeeze margins, largely to the benefit of the marketplace owner.

Moving forward, if the world wants to ‘build back greener’, digitising the multi-billion-dollar commodity value chain is a key part of that process. It will be disruptive, and require investment in new technology and skills, but businesses prepared to grasp the nettle will put themselves on a more profitable and sustainable growth path for the future.

If you’re interested in learning about how NovaFori facilitates digital transformation discussed in this blog, get in touch.

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