This in-depth article from Boris Galonske explains how digitization helps improve resilience in commodity trading.
“Commodity trading suffers from shrinking margins and in some commodity classes also from low price volatility. At the same time operating environments struggle with manual routines, legacy processes and systems resulting in high cost income ratios (CIR).
How can this challenge be addressed and how can the profitability and the resilience of trading businesses be increased?
Commodity trading exhibits still several manual routines in its workflows, given the physical nature of the business and established processes in the industry. At the same time margin pressure increases as the inherent profitability of several trading businesses decreases. How can this be addressed?
Commodity trading business characteristics
Commodity trading businesses are typically lean by nature. Several years back, high performing businesses exhibited cost-income ratios (CIR) in the range of high 30% – medium 40%. These days these ratios are significantly higher. Large European commercial banks – as a comparison – even exhibit cost income rations in the range of 70 % – 90% +.
In order to tackle the profitability gap, analytics and middle office activities have been scaled down.
However parts of the trading process have remained untouched.”
Points covered in this article include:
- How digitization can help
- Reservations about digitization
- How to approach trading digitization
Read the full article or download the PDF, Monetizing Digitization Levers, on the Silverberg Partners website.