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.
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).
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:
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.
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:
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.
BCG’s Antti Belt gives insight on how traditional leaders can combat new digital players encroaching on their turf by thinking how they want to compete, which small digital projects they can launch, and scaling their best projects fast.
By making smart moves and adopting the right business model, companies can mitigate the risks and capture the upside of digitization.
BCG’s Eric Boudier discusses the importance of commodity trading and risk management.
Digital forces are transforming commodity trading’s value chain and sources of competitive advantage, redistributing billions of dollars in trading value in the process.
This sophisticated digital tool models global oil supply and demand to help companies manage the uncertainty of today’s market.
Blockchain might not be the panacea some anticipate. But the hype surrounding it could drive attention and solutions to the problems that plague commodity trading.
