All of the raw materials that underpin human existence can be broadly categorised into four types: fuels, metals, agriculture and livestock
These commodities are required to produce everything we need to survive — energy, food, construction materials, textiles and the like. It’s no wonder, then, that trading in these assets is a market worth hundreds of billions of dollars.
Commodities trading had traditionally been a closed shop, where only industry insiders had access to information about the supply and demand of oil, metals, grain and the like. But technological advances have left few industries untouched in the 21st Century, and commodities trading is no exception.
In the past, the quality of the data that traders had depended on them developing relationships with the right people, building a network of sources who had exclusive information about the movement of various commodities. However, each source would only have a small piece of the overall picture, so getting all of the data required a lot of conversations. Often, too, the information could be inaccurate as it was days or weeks out of date.
Fast-forward to the present day, and advances in technology have meant that the information required to make profitable trades has become easily accessible, thanks to independent and trustworthy providers. Data is more up-to-date and comprehensive — again, thanks to technological innovations — so it is much more reliable. To an extent, this has led to the democratisation of commodities trading; while you’ll still need a significant amount of capital to buy and sell cargoes, being successful is less about who you know and more about what you do with the information that counts.
Data science-backed intelligence for traders
There are a large number of variables that affect the price of any given commodity at a certain point in time. Commodity production, flows, consumption and storage need to be tracked in order for traders to make optimal decisions. Most of this data comes from hundreds of sources including customs, port authorities, ship agencies, AIS (Automated Identification System) radio signals and newsfeeds.
While larger traders might have teams of data scientists tracking all of these variables, independent data and analytics providers now play a key role in commodity markets. These providers offer access to platforms designed by and for data engineers, scientists and market analysts that are capable of processing and aggregating millions of data points, using Artificial Intelligence and Machine Learning technologies to give traders up-to-the-minute insights. Traders can use this intelligence to better understand current and past trends, uncover new opportunities, monitor their competitors and feed into their own analysis models. This goes to show that in the 21st Century, trading commodities is becoming more of a data science business than a relationship business.
Technological progress has also increased the number of sources that are available to commodities traders, as well as improving the quality and accuracy of data. Satellite imagery has made it possible to accurately track the movement of vessels from space and ascertain the location and number of storage tanks of commodities such as crude oil. More recently, drones have been used to augment satellite imagery in locations such as Cushing, Oklahoma, the world’s largest crude oil tank farm. Fitted with infrared cameras, these drones can gain very exact data about the amount of crude oil in each storage tank. This extra level of information gives traders a competitive edge when tracking the movement of commodities, especially if they are able to access it instantly.
Technology is democratising the commodity trading space
The availability of data and better access to analytics platforms means that commodities trading isn’t just a game for giants any more, with small- and mid-size trading firms able to compete on a level playing field. But while these technological advances have served to democratise the industry, they also offer solutions to problems when they arise, lessening the impact of potentially disastrous events.
For example, when the Ever Given container ship blocked the Suez Canal in March 2021 traders were able to quickly change their strategies by rerouting vessels, ensuring shipments didn’t get stuck. Fifty years ago, such an event would have been catastrophic as information about the blockage wouldn’t have been available promptly. Thanks to data-driven tracking methods, traders were immediately aware of the problem and were able to adjust their plans accordingly, avoiding disruption to supply chains to the benefit of end consumers.
But applying the most advanced technologies to commodities trading shouldn’t be considered an end in itself. It’s only appropriate to use a technology if it is actually solving a problem. The Holy Grail for traders is to have access to accurate, granular data in real-time so they can be fully informed and make the best possible decisions. While in certain cases new technologies can move the needle in the right direction, sometimes the best solution to a problem is the most simple and agile one.
How technology will affect the future of commodity trading
The role of technology in overcoming the problems the industry has faced to date has undoubtedly been important, but some of the most significant challenges still lie ahead. Commodities are increasingly under scrutiny as the world looks to lower emissions and hit net zero targets. This will have a massive impact on the energy sector in particular, though no category of commodity will be unaffected. Everyone will feel the impacts of this, from producer to end consumer, and the role that data analytics will play in helping stakeholders make strategic and greener decisions will be crucial.
The drive to eliminate the use of fossil fuels and increase reliance on biofuels and other fuels such as hydrogen will be particularly significant. Clear and accurate data sources covering the hydrogen market will be key, as will the tracking of the various raw materials required to develop battery technology. We will also need to be able to track carbon emissions more accurately in order to see which industries and businesses are meeting their targets; currently there are few agreed standards for tracking this and there is a large reliance on self-reporting.
In summary: Technology will continue to play a key role in commodities
The impact that technology has had on the commodities market is undoubtedly significant. Commodities affect everything we do, and the role of technology in making this area more open and transparent through increasing the accuracy and availability of critical data cannot be underestimated.
However, in the grand scheme of things, the digitalisation of commodities trading will be an ongoing process and we are only just at the beginning. The transition to net zero is going to radically accelerate this process. The more sources of accurate data that the key players have access to, the better the strategic decisions they will be able to make. With the right technologies applied in the appropriate way, the outcomes will be of great benefit to humanity; significantly reducing carbon emissions and helping to mitigate the effect while ensuring that the global economy continues to function smoothly.
About the Author
Gaspard Duguet is Product Manager at Kpler. Kpler is a fast-growing data and analytics firm on a mission to facilitate sustainable and efficient trade, to meet the changing needs of our world. From numerous disparate and unstructured sources, Kpler creates data & analytics enabling market professionals to make informed and timely trading decisions. Kpler specialises in dynamic markets characterised by opaque and incomplete information, such as commodity markets.
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