Since we began building the DCX agricultural commodity platform in September 2019, a series of events have transformed the world around us, especially for international commodity trading:
1. Jan 2020 – Covid-19 outbreak in Wuhan, China. Start of the COVID-19 global pandemic.
2. Mar 2020 – Almost total shutdown of global aviation. Passenger flights halted.
3. Apr 2020 – Large scale port disruption as a result of COVID-19 restrictions.
4. June 2021 – Container freight prices begin rising, accelerating in Q4 with bulk rising too.
5. Mar 2021 – Ever Given blocks the Suez Canal, highlighting logistical bottlenecks and putting pressure on global ‘just-in-time’ supply chains.
6. Sept 2021 – Spike in European gas prices
7. Feb 2022 – Russia invades Ukraine. Black Sea grain, oilseeds and pulses trade severely disrupted. Heavy commercial and banking sanctions imposed on Russia.
It is easy to characterize this as “globalization in reverse”. Some aspects of “pre-COVID” life may have changed forever, such as home-working. International passenger airline traffic is still significantly below 2019 levels, although this seems to be attributed to reduced business travel rather than a reduction in tourism.
In terms of international trade, the march of globalisation continues almost unabated. Global imports and exports reached record highs in2021. This in turn explains why freight prices hit record levels and why supply dislocations have caused disruption at many ports.
The value of global trade reached a record level of $28.5 trillion in 2021. That’s an increase of 25% from 2020 and 13% compared with 2019, before the COVID-19 pandemic struck.
In the commodity space, international movements are also at record high. For instance:
The final 2021 trade data published by the US Department of Commerce showed that exports of farm and food products totalled $177 billion, topping 2020 total by18%, eclipsing the previous record set in 2014, by 14.6%.
We see competing forces at play.
1. Dwindling reserves of commodities markets ENCOURAGE international trade. As world supplies of oil, lithium, phosphates and water dwindle, we will have to go FURTHER to get what we want.
2. Higher freight prices increase the incentive to source closer to home. We expect trade to become more regional as a result.
3. World financial conditions, price volatility and sanctions mean that trading and counterparty risks are greater than they have ever been.
4. Buyers need to increase their flexibility to source from new origins and from new suppliers in order to get the best deals.
5. Banks are getting out of trade finance and supply chain disruptions mean that working capital needs have exploded
6. New financing and payment solutions are emerging at an accelerating pace.
How can DCX respond and help its customers?
Better data about counterparties and trades
Technology can provide accurate and plentiful data. The benefit of this is greater transparency and better-informed decision making. For individual transactions that transparency should be for those involved in the trade itself. But pre-deal we help with both customer and price discovery, giving buyers the ability to be able to easily compare all-in pricing from suppliers in real time across different geographies, giving them accurate data about their financial standing and origin of goods/funds.
We are still only in the second innings of digital integration in the agricultural commodities trade. We have comparatively few API (application programme interface) connections at present, but that will change dramatically over the course of the next five years. Having trusted structured data will allow service providers – finance, insurance, surveyors and freight to better assess risk and offer better pricing to those that deserve it.
The increase in container prices caused many users to look for alternative freight options. Filling a whole vessel is often the best outcome and often it would be optimal to share with other players. Coordinating this requires higher than normal levels of data sharing and trust.
Alternative finance and payment options
Banks have been steadily getting out of both trade finance and payments as traditional relationship banking declines. Those that remain want to find ways to better control risk with risk mitigating products. In the vacuum a whole new ecosystem is emerging, ranging from the existing model to new open finance and insurance platforms. DCX is open to working with all of the above. Whilst customers have different needs everyone wants quick and transparent decision-making.
DCX is creating regional instances of our core platforms that allow users to quickly tap into proximate suppliers with dramatically reduced freight costs when previously they would have used intercontinental routes.