Commodities trading is a foundational part of the modern supply chain. Companies around the world buy and sell raw materials that they then transport, manufacture, process, distribute as products, and so on.
The supply and demand for various commodities changes constantly. Therefore predicting things like availability and price is challenging. It makes sense. A thousand factors can affect the price of grain, metals, lumber, and, critically, fuel. This is a serous pain point for many organisations, given how susceptible commodities are to macro and microeconomic influences. Therefore, mitigating commodities volatility is a key goal of supply chain organisations. Exactly how they mitigate this uncertainty us a complex process.
We spoke to Graham Cade, Head of Operations at Attara about commodities trading, the supply chain, and how businesses can mitigate the risks posed by uncertainty.
1. How do commodities impact the supply chain?
“Most companies will trade in commodities at some point along the supply chain in order to create or distribute a functioning product. These are raw materials, meaning the supply and demand is in constant flux, and so too are the markets they’re traded in.
“Impacted by the smallest of changes in macroeconomic and geopolitical dynamics, the commodities market is extremely volatile, making predicting the price of fuel, grains, or metals impossible for companies of all sizes planning their finances.
“Supply chain management is an intricate web: sustainability and responsible sourcing, managing risk and proofing data are just some of the many factors that will impact a business, but careful management of a supply chain is obsolete if companies are exposing themselves to the risk of changing commodity prices throughout.”
2. What are the external factors businesses need to be aware of?
“It seems obvious to say that we’re living in uncertain times, but really the last few years have been considerably more unpredictable. Geopolitical tensions have remained heightened, some economies are recovering from the pandemic faster than others and concern increases as climates become more extreme.
“Just last month, European gas prices reached a two year high due to a cold snap. Farmers protested new taxes in London. And the price of gold has been elevated for weeks now.
“For smaller businesses trying to keep their bottom line water tight, dealing with fluctuating outgoings is near impossible when it comes to planning ahead.”
3. What is commodity hedging and why is it the solution? Who can access it?
“Commodity hedging is something that has been traditionally reserved for the bigger players in the market; conglomerates and multinationals using big banks with full service offerings. UK SMEs haven’t benefitted from these tools because they just weren’t aware of them, even though there are 5.5 million SMEs in the UK underpinning large sections of the economy.
“However, emerging technology has allowed us to provide simple tools for companies of all sizes. Through hedging, we can leverage our access to multiple markets to ensure that we effectively manage risk exposure by using derivatives across a broad spectrum of industries. By offsetting the changing prices of raw materials, companies are able to plan ahead, giving them the winning hand in a game of the unknown. It’s impossible to always know what’s around the corner, but with the latest technology, businesses have a protective shield against whatever is.
“To put this into perspective, a haulage firm’s spend on fuel is likely to be its third largest outgoing behind wages and real estate. Leaving this number to chance doesn’t sound like a responsible business decision. However, many businesses are forced to because they don’t know there’s another option. The ability to lock the price of fuel in for a year or so allows a company such as this to make confident and informed decisions. In the same vein, what if the local family bakery could predict what they would be paying for their ingredients for the next six months?
“Although profits will vary between businesses of different sizes, risk is relative. It’s an injustice to see external factors that hedging can mitigate erode businesses’ margins.”
4. What are your projections for the markets this year?
“It’s safe to say volatility will continue to characterise the markets. UK SMEs are already treading a risky path following the Autumn Budget Announcement, which increased business tax burdens and the cited numbers for UK economic growth are dwindling.
“Tensions are high following the US announcement of a 25% import tax on all steel and aluminium entering the US, ending previous exemptions for allies including Canada and the EU; it remains to be seen how this will impact the UK directly, however the wider markets will certainly feel the ramifications in full force and are likely to be more changeable than ever.
“This is all underpinned by a wider race to net zero. With the future of EVs in hot debate, what will the demand for certain metals look like? The latest change in policy is likely to upset the delicate balance of supply and demand, so what’s the best solution in the move away from fossil fuels?”
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