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Commodity Trading

As markets shift from the classic B2B structure to competitive, openly traded energy commodities, many commodity players experience a significant impact on their businesses. The resulting price transparency and product availability leads to bigger commercial competition in both placing and obtaining goods. Commercial margins come under pressure and erode, and opportunities to arbitrage start to deteriorate but not vanish.

Such phenomena can be seen across all commodity markets—energy, oil, coal, metals and mining, and agriculture. By actively targeting and extracting value from prevailing market conditions, it’s possible to find commercial success even in mature, commoditized markets. Players need to understand how to leverage their competitive edge, such as by embracing the transition into traded markets, leveraging an asset and logistics portfolio, and adopting new commodity trading technology and approaches, like digital commodity trading.

Embracing Commodity Trading Business Model

Immediate and intuitive approaches to the challenges of commodity trading include gaining a cost-based advantage and redifferentiating product offerings by modifying their characteristics and value proposition. Such moves are effective in gaining a short-term license to operate but don’t typically help with long-term survival.

For a sustainable commercial approach, organizations need to systematically exploit market opportunities and volatility. Producers, for example, must augment their traditional marketing and supply model (which extracts so-called intrinsic value from the difference between the market price of their products and the cost of production) with the commercial arbitrageur model (which also extracts the so-called extrinsic value that comes from price signal discrepancies and imperfections).

Mastering the Next Wave of Commodity Trading: Digitization and Hyperliquidity

Even those who are already pursuing a commercial model—leveraging and managing the entire commercial value chain against trading markets as core value contributors—cannot stand still. The journey of the markets toward more commoditization continues—currently driven by increasing digitization of value chain participants in commodity trading and the sometimes staggering rise of liquidity, leading to hyperliquidity.

The next wave of commoditization poses severe risks to players who successfully operate in trading markets. There are three main drivers:

  • Greater information transparency and accessibility, including price data reporting and distribution
  • Increasing degree of standardization, such as how transactions are carried out
  • Emergence of advanced digital commodity trading

These trends are reducing trading-market opportunities and inefficiencies that commodity trading risk management professionals long have relied on. It’s time to move past established models of operations.

The Right Operational Platform for Today's Commodity Trading

Dramatic change in energy and commodities markets must be matched by changes within the organization and of the operational platform. Successfully trading and optimizing the entire commercial commodity value chain in commoditized and traded markets requires a commodity trading strategy that includes agile and scalable operating models, entrepreneurial and risk-accepting organizational cultures, and skill sets that many companies will find foreign.

Indeed, the toughest part of adopting a more traded commercial model and embracing the ongoing digitization of commodity trading is the overall change that is required. Many companies underestimate the amount of change needed across the entire organization and the rigor it takes to build a competitive operational platform. Successful change requires a rework.

BCG's Commodity trading consultants help clients reinvent their operational platform with:

  • A superior understanding of the market, including the ability to detect genuine market opportunities and anticipate how they might evolve
  • Agility in exploiting short-term market opportunities
  • End-to-end transparency and perspective on the integrated value chain to optimize the commercial margin
  • A competitive IT and digital infrastructure
  • Tight control over commercial operations and strong commodity risk management capabilities to ensure decision makers don’t misuse their freedom and stay within assigned parameters
  • A large, diverse market footprint comprising mining assets but also third-party contractual commitments that allow easy access to the commodity beyond the company’s asset footprint

Moreover, players with an existing commercial marketing and supply model must blend the classical approach with the previously described energy trading and risk management one—reaching a consistent concept for commercial steering and governance, performance and incentive management, and target behavior and culture.

Meet Some of BCG’s Commodity Consulting Team

Learn More About Commodity Trading

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Eric Boudier on Commodity Trading and Risk Management

BCG’s Eric Boudier discusses the importance of commodity trading and risk management.

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