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A NEW ERA OF POLITICAL TURMOIL
Over the last several years, the influence of geopolitics has been increasingly keenly felt by those involved in commodity supply chains to the point where it could be argued that geopolitics are now a primary driver of volatility and risk in commodity markets. These trends partly reflect the growing division between a western world committed to a wide variety of politically driven policies around environment, health, safety and sustainability, and a China/Russia-led BRICS world that is looking to go its own way. Additionally, wars in Europe and in the Middle East are playing a role that is also highly politically charged. The overall result is a swathe of new regulations, trade restrictions, sanctions and disputes that increasingly threaten global trade patterns.
While the fundamentals of supply and demand obviously still impact activity and pricing, even here political influences can and may color the associated risks. At the recent LME Weeks’ LME Metals seminar 2024, geopolitics and their influence on metals trading and risk was also high on the agenda for discussion. This
white paper seeks to review the current global impacts of geopolitics on metals trading and assess how that impacts high-level requirements for Commodity Trading & Risk Management (CTRM) and related software solutions.
WARS AND TRADE WARS
The war between Russia and Ukraine has been ongoing for some time now and still has the potential to broaden. The direct impacts of this war were to highlight Europe’s dependence on Russian gas causing massive price spikes for energies that had a knock-on impact on the cost of other materials like metals and, of course, helped to drive inflation. However, the war also highlighted and fueled a growing split between a China/Russia-led BRIC group of nations and the west. Sanctions against Russia, Russian companies and individuals also created complications for trading that has altered the pattern of crude oil trading considerably already as firms sought ways to trade Russian and Iranian oil circumventing these sanctions.
However, of broader concern has been how this has fueled a move by many nations to join the BRICS initiative that in part, is aimed at circumventing the international SWIFT clearing system, undermine the US Dollar, and arguably enhance the ability of various nations to profit
from their raw materials including metals. The new payment and clearing system called mBridge that the BRICS are introducing reached minimal viable product stage in early June 2024. mBridge is the result of extensive collaboration starting in 2021 between the
BIS Innovation Hub, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China and the Hong Kong Monetary Authority. The Saudi Central Bank has also recently joined mBridge as a full participant. There are now more than 26 observing members that may join as the project moves forward. But what is mBridge?
mBridge is a payment system created to address financial inclusion concerns by the BRICS. It aims to address some of the key inefficiencies in crossborder payments, including high costs, low speed and operational complexities, according to BIS, that states that “multi-CBDC arrangements that connect different jurisdictions in a single common technical infrastructure offer significant potential to improve the current system and allow cross-border payments to be immediate, cheap and universally accessible with final settlement.” However, as American farmers have already discovered when China cancelled purchase contracts in 2024, it allows BRICS nations to source
and pay for commodities in a way that is totally opaque to traditional western-backed systems. This translates into an impact on price discovery and supply data.
Meanwhile, another war got started in 2023 in the middle East and this has already had an impact on transportation costs and deliveries as shipping was directed away from the Suez canal. This war also has the possibility of expanding and creating an even greater impact on global trade. However, it also has helped to further polarize global political positions.
The overall impact of these wars and trade wars –potential or active – include increased complexity, increased costs, reduced efficiency, increased risks of fines and penalties, increased operational risks, market risks, credit and legal risks. They also potentially impact supply-demand patterns and trade routes adding to price volatility while the BRICS payment system reduces price and sourcing discovery and undermines the US Dollar.
INCREASING REGULATION
In recent years a whole swathe of regulations have emerged that impact commodity traders including, for example,
1. Dodd-Frank Act (U.S.): This legislation introduced extensive reforms post-2008 financial crisis, affecting derivatives trading and requiring more oversight for swaps and futures markets.
2. MiFID II (EU): The Markets in Financial Instruments Directive II aims to increase transparency in trading and enhance investor protection, impacting how commodity derivatives are traded in Europe.
3. Position Limits: New position limits in certain commodities are designed to prevent excessive speculation and promote market stability. Traders need to be aware of these limits to avoid penalties.
4. ESG Regulations: Environmental, social, and governance factors are becoming increasingly important, with regulations requiring disclosures on sustainability practices that affect commodity production and trading.
5. Trade Reporting: Enhanced reporting requirements for commodity trades to regulators aim to improve market oversight and transparency, requiring traders to maintain detailed records.
6. Cybersecurity Regulations: With increasing digitalization, regulatory bodies are emphasizing cybersecurity measures to protect trading platforms and data integrity.
7. Market Surveillance: Stricter regulations on market manipulation and insider trading are being implemented, leading to greater scrutiny of trading activities.
Political policies around environment, sustainability and other social isues are also driving substantial change. For example the EU has created a scheme to help reduce deforestation called EUDR that will kick in for a variety of commodities by end of 2024 requiring extensive traceability, due diligence and proof of compliance from entities importing these raw materials into the EU. The US has already suggested that it sees this as a form of trade barrier and threatened to retaliate. China has also robustly expressed its concerns. Despite this, there is every chance that other jurisdictions will eventually introduce similar legislation. Other initiatives that are politically motivated are also being introduced by the EU and the US in other areas around issues like net zero, ESG, child labour and much more. Each increases complexity for commodity market participants and present barriers to trade that may result in retialiation by other nations or groups of nations. Many of these impact metals mining significantly and commodities generally as well requiring additional reporting, data collection, processing and in some
instances, enhanced traceability and other functions. While some regulations carry penalties, they all add the risk of unanticipated delays in shipping that can also impact contractual delivery incurring penalties and additional complications.
Among the many and increasing number of regulations that commodity market particpants face are those requiring carbon footprint and ESG reporting. Sometimes, these emerging regulations can be lacking in detail in terms of what they will actually require making it difficult to forsee what compliance may mean. Areas like carbon footprint reporting additionally impact many more firms along the commodity supply chain as well adding costs and complexities that get passed along to market participants as increased costs.
Futhermore, health and safety regulations also are being bolstered requiring monitoring and reporting in this area too and in some instances, an accident can result in temporary closure of an asset of facility. This
also results in delays, possible penalties and risk.
As more and more new regulations are introduced so too are those impacted by them being expanded as well. For example, on 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force in the EU. It strengthened the rules concerning the social and environmental information that companies have to report and moved to ensure that a broader set of large companies, as well as listed SMEs, would be required to report on sustainability. Furthermore, these rules go beyond the EU as a jusrisdiction as some nonEU companies will also have to report if they generate over EUR 150 million on the EU market.
Given the more active nature of politicians over the last decade in terms of introducing controls, policies and restrictions like those cited above, it is almost certain that more regulatory involvement in commodity markets is highly likely and should be expected.
IMPACTS OF GEOPOLITICS ON METALS
As we have shown, geopolitics now represent key risks in almost all areas of metals and broader commodities trading and movements. Essentially, traders face increased market, credit, operational, legal, country and other risks that will need to be addressed adding costs and complexity to their operations. Companies will need to ensure that they are properly informed concerning new regulations and developments in all jurisdictions that they operate in and ensure compliance.
However, here are some specific areas that will need to be addressed.
• There is a greater need for timely information –not just around regulatory issues – but in terms of news, many different types of data and analysis. This data will need to be up to the minute and be in a form that is readily consumable.
• Given that the frequency of politically-driven shocks to the market is increasing, it will be prudent for all firms reliant on commodities to engage in proper market risk management including an emphais on simulation and scenario testing so that they understand the risk of sudden market movements on their positions. This needs to include looking at FX and IR as well as commodity prices as both exchange rates and interest rates are a part of the political riskset now facing firms.
• Increased awareness of environmental and other regulations is also needed in order to avoid not only disruption to operations but also fines, penalties and delays. Regulatory reporting, due diligence and supporting activies are also needed.
• Much greater emhpasis will be required in certain areas in terms of functions like traceabilty, workflow, audit trailing and more from the software systems employed in the business to help manage trade and movements of metals and commodities and to reduce operational and other risks.
All of these of course impact systems like ERP, Commodity Management, Commodity Trading and Risk Management, Risk systems, treasury systems and the like in terms of new requirements, reporting needs and system features.
QUOR EKA – PROVIDING THE TOOLS TO HELP BEAT GEOPOLITICAL RISKS
Quor Eka is well aware of the challenges geopolitics create for its customers and it sees those challenges in the following areas.
• Beyond regulatory updates, companies need comprehensive, real-time insights encompassing news, diverse datasets, and detailed analyses. Immediate access to relevant information in an easily consumable format enables swift response to emerging risks.
• The rising frequency of politically driven market shocks necessitates advanced risk management practices. Scenario testing, including simulations of commodity, FX, and interest rate fluctuations, is essential to quantify the impact of sudden price shifts on trading positions and portfolios.
• Staying compliant with environmental and regulatory standards is crucial to prevent operational disruptions, fines, and delays. This involves systematic regulatory reporting, due diligence, and supporting activities to safeguard against unforeseen liabilities.
• Effective trade management in the current environment calls for robust traceability, workflow controls, and audit capabilities. Software systems supporting metals and commodities trade need advanced functionalities to mitigate operational risks effectively.
These needs influence essential enterprise software systems like ERP, Commodity Management, CTRM, risk
management, and treasury systems, necessitating new features for risk mitigation, compliance, and reporting and to help firms with these challenges, it has a range of solutions specifically for metals and commodities, as well as other solutions targeting the supply chain including stockyard and warehouse management.
Quor Eka has long been the industry leader in CTRM solutions for the metals industry and it offers tried and tested software solutions that help manage the entire supply chain like Fintrade and Trinity that target both physical and financial metals trading and risk management. With its large global installed base, it is constantly innovating its software while keeping it up to speed with remerging regulations and other requirements.
Trinity and Fintrade provide real-time visibility into metals operations while providing a range of tools to do everything from managing trades and risk to perform accounting functionality. In terms of helping to navigate the new risks associated with geopolitics, the following are selected key attributes of the solutions.
• Powerful stress and scenario testing to understand the impact of shocks in price, implied volatility, foreign exchange and interest rates to positions
and P&L.
• Tracking of credit risk and the tools to react rapidly to an adverse scenario
• Reporting the impact of trade events or market data changes to the overall P&L
• Perform detailed P&L analysis to explain fluctuations with drill down to counterparty, portfolio and trader level.
• Help manage operational risks through workflow, audit trailing and regulatory risk via regulatory reporting.
• Traceability is built into the solution allowing tracking and tracing from start to finish
• Help manage liquidity via treasury and accounting functionality.
Real-time visibility and many other benefits can also be obtained by using its warehouse management solution. Together these solutions can aid metals traders, producers and consumers, not just in managing their exposures to geopolitical risks, but in optimizing their entire supply chain and operations, reducing costs and the possibility of penalties or additional fees.
Quor Eka is committed to ensuring customer satisfaction and so it is constantly engaged in watching developments on the market for new regulatory or other requirements that will impact users. It works with its global installed base of customers to prioritise and deliver the functionalities that are needed in today’s every complex metal and commodity markets.
ABOUT QUOR EKA
Quor Eka offers extensive CTRM/ETRM expertise across ags, softs, fertilizers/chemicals, liquids, precious metals, concentrates, energy and much more. We are able to provide the industry a very unique offering that meets the growing demands of commodity traders, energy merchants miners, industrials to producers providing best-in-class functionality, user
experience, technology and services. Our product roadmap is innovation-centric, focusing on AI and delivering strong product value propositions with clear short-term, medium-term, and long-term goals.
Quor Eka has offices across Americas, Asia, Australia, and EMEA serving 100+ customers globally across multiple commodity segments.
ABOUT
Commodity Technology Advisory LLC
Commodity Technology Advisory (ComTech Advisory) is the leading analyst organization covering the Energy and Commodity Trading and Risk Management (E/CTRM) and Energy Transition technology markets. Led by Dr. Gary M. Vasey, along with affiliate analysts Dr. Irina Reitgruber and Kevin Mossop, ComTech Advisory provides invaluable insights, backed by primary research and decades of experience, into the issues and trends affecting both the users and providers of the applications and services that are crucial for success in markets constantly roiled by globalization, regulation and innovation.
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