- Commodity trading stands on the brink of digital interruption, a factor that has mostly evaded the multitrillion-dollar sector for years.
- Trading companies as well as the banks which sponsor them wish to lower the susceptibility to document fraud.
- Blockchain presents a technology that commodity companies wish to get support from to enhance tracking.
Finally, an industry of multitrillion-dollar is going through a digital transformation as commodity traders turn to technology to provide solutions for their world issues that have existed for an extended period. From cocoa, chemicals, cotton, soybeans and crude oil, the trade of physical commodities concerns the purchasing and selling of raw materials which are utilized in day to day life like food, fuel or ingredients for finished items.
The government of Singapore (a trading center for the majority of these products) approximates that commodities worth around $10 trillion are manufactured and consumed each year. Regardless of the industry’s size, a considerable part of the worldwide business continues being managed conventionally and on paper, especially in the trade of products that are non-industrial and agricultural.
Many observers and go-betweens have focused on the sector’s proceeds, all emphasizing on the main query: How do you make sure that the goods you obtain were precisely the one you requested?
‘Trading entirely involves manual documentation. They do not rely on counter-parties. Therefore, they engage intermediaries and middlemen to verify the correctness of the documents. It is similar to previous times as they dispatch the documents and all other things even in the current world,’ stated Srinivas Koneru who established Arkratos, a technology firm dealing with the issue.
That cumbersome procedure does not just disrupt the economic efficacy but forms many openings for fraud at every contact point also.
Years after a lot of important industries have mainly turned digital, other technologies to solve the issue are starting to gain momentum in the world of commodities. For example, blockchain technology has so far given an assurance of being a safe and unvarying record keeping tool which is capable of tracing goods.
Currently, the procedure necessitates commodity transactions to need a set of necessary papers. It includes documents for shipping, which are moved all through extended supply chains which involve many parties as well as diverse regions. Those documents undergo manual stamping and are emailed to and fro. Invoices are manually scanned and attached to emails.
As shipment moves from one individual to another and ships, it passes through people, vessels, firms, and states. Each of them requires to follow various rules, formats, and systems of documentation. It makes it hard for fraudulent changes to be recognized. It means that it is very likely for nearly any document to be diverted and altered at any point between the first supplier and final consumer.
In around 20 years, their manner of processing documents remains similar. It is relatively manual, stated Randy Wilson, a Deloitte commodity trading and risk management leader in the U.K.
Wilson gave a speech at a press briefing in May regarding the industry of oil and gas. However, traders across the considerable commodities sphere claim to have the same problems. Mediators and firms exist that can confirm the goods’ and papers’ genuineness at any stage. However, it increases the cost of the procedure, and it takes up more time.
For example, any irregularity should be checked twice by placing a call then documents are sent again via courier or email. Those suppliers of confirmation services such as surveyors are the first ones to be thrown off-balance in a technology change handling the problem.
The general confirmation procedure is especially crucial in financial worldwide trade activities.
Trade financiers ‘should try to decipher the genuine trades,’ remarked Cheam Hing Lee, Rhodium Resources CEO. It is a Singapore commodities trading company whose founder is Arkratos’ Koneru.
In the previous five to ten years, an increase in fake documents has taken place,’ said Wilson from Deloitte.
Cheam gave the illustration of bills of lading fraud. A transport operator provides that document to confirm obtaining cargo for shipment. A signature is appended to it to establish genuineness.
‘Top-notch scanners and photocopiers can currently produce a copy of the original bill of lading and include false data,’ remarked Cheam. He has been in commodity trade financing with crucial banks and Cargill, a commodity giant for 25 years and more.
Nowadays, the photocopier machine can produce a duplicate of something which precisely resembles the original, such as the black and blue ink being signed or green ink or yellow ink. ‘
When this is accessible to you, it gives you leeway for fraud,’ Cheam informed CNBC.
He also added that watermarks can be duplicated convincingly.
Fraudsters can utilize the fake documents to make believe that they have a lot more shipments of a product than they do. After this, they can get bank loans using their imaginary provision as security.
Some firms are utilizing artificial intelligence to recognize fraudulent documentation; however, according to Cheam, the technology remains ineffective.
There is another fraudulent act known as ‘invoice spoofing’ that concerns diverting invoices and altering the specifics of the bank account regarding the destination of payments. Wilson from
Deloitte indicated the occurrence of that activity had increased a lot in the previous few years.
It all signifies the increased danger for various parties, for example, the end purchaser who ordered and the financial organizations issuing loans.
A dishonorable example of a scam like this was a fraud of $3 billion in China at the Qingdao port. Here, it was believed that fake, photocopied warehouse certificates existed. The happening annoyed the 2014 metal markets as the fraudulent receipts had been utilized to pledge a similar cargo of metal many times.
The other day, ANZ in Australia and Natixis bank in France were highlighted when the two were involved in another incidence of alleged fraud where warehouse receipts were involved in connection with Glencore, a giant for a unit of commodities.
No comprehensive data exists about the amount of cash financiers are losing from cheating incidents like these. But, commodity companies and banks are seeking a method to eliminate the act permanently. Majority state that the solution is to create a technology to trace the goods accurately.
However, the difficulty is making firms comply with a single digital standard and creating an environment around it. It is going to need the buy-in of existing trade participants such as regulators and enterprises that the state owns.
Also, there is a lot of rivalry on the selected platform.
Gas and oil majors such as Royal Dutch Shell and BP have taken the role of a section of a consortium which is creating a digital platform that is blockchain based.
The initial trade on the structure will occur in November, said Platts.
‘Any Singapore trading room front office completely agrees that blockchain is going to alter not only our trading method but possibly what we trade as well as who we trade with,’ stated Iain Lawson, the head of structured items for the eastern hemisphere in BP, at a conference at the beginning of this month arranged by S&P Global Platts.
Start-ups also exist which endeavor to lead in the sector, such as Arkratos which is privately sponsored. It indicated that it works on an ‘open blockchain’ which is going to enable various parties to reach its system.