Practice Lead: CommoditiesI’ve spent my entire career in the capital market and commodity industry. My experience spans trading physical products, paper and complex derivatives, to leading risk management teams, both market and credit, within front and middle office of financial institutions active in commodities as well as energy and utilities majors and commodity houses. When time permits I can be found on daddy duty to my two naughty sons, reading or solving puzzles.
Europe’s utilities market has never been so challenging. The introduction of the European Commission policies across the European market and national renewables targets, carbon emission reductions, ever increasing price regulations and new G20 regulatory requirements all combine to make for a challenging time.
Utilities firms have been under pressure in recent years. Focusing on market capitalization, the main five power generators in the EU have collectively lost more than 105 Bn euros since 2008. This prompted the industry to question the old utility business models. More initiatives have been visible in the Renewables energy technology and addressing environmental concerns, and evolving customer requirements are the main cause for transforming the production and consumption of electricity globally. Therefore what we have been experiencing is the restructuring of major European utilities to split fossil fuel and renewables businesses to be able to position themselves better in the market and manage their businesses better. This is also inevitable given the fact Brussels is currently debating more reforms to the EU emissions trading scheme with the focus on when, instead of if, measures will be introduced to further increase the price of carbon. Therefore this highlights a significant risk to European major utilities firms where coal currently accounts for over 65% of their emissions from power, and all have a high exposure to coal.
Most European players in this sector have invested in wind farms, hydroelectric dams and other renewable energy sources. As always technology plays a significant role. IT transformation is apparent in production areas such hydraulic fracturing and extremely responsive microgrids, and on trading floors where Big Data analytics provide accurate insights from the vast amount of data available on consumption, demand patterns and market trends.
At BJSS we are engaged with firms across commodities sector providing world class transformational consulting and access to our BJSS Bid Data analytics labs.
One of the notable events last week was that greater investor appetite for riskier assets supported gains in equities as well as rallies in commodities and crude prices – the biggest weekly rally since early 2011. Some might see this as the sign that the worse was over for the entire commodity spectrum which was originally sparked by weaker data coming out of China. However several other factors suggest fundamentals have not changed much and bearish market trends are likely to persist.
Oil market fundamentals remain weak and the fact that the market is well oversupplied indicates that prices will remain at the current levels for the forseeable future.
With LME week events on-going in London this week it’s interesting to examine base metals fundamentals. Copper and Aluminium prices are expected to fall further next year, with Copper expected to push to well below the $5,000 level. The forecast for Aluminium is even worse thanks to China’s weak demand this year, suggesting they remain at 2003 levels for a while. Glencore’s plans to cut Zinc production by half a million tons made for only slightly better news for Zinc.
With record low prices across commodities, particularly oil and base metals, profits have been hammered. Last week’s rally provided some profit taking opportunity but given the bearish outlook, alternative measures are required to protect balance sheets.
The current extreme price volatilities in commodity market suggest a greater focus on ‘Trading’ is in order. Good trading strategies could help recover some of the losses resulting from the drop in prices. The volume and complexity of data required to support successful trading strategies is growing dramatically. Decision support solutions based on traditional database solutions are often too slow and labour intensive to deliver the insight required. The BJSS Big Data Lab is helping clients assess how Big Data analytics can enable traders to stay ahead of the curve with more rapid and accurate decision-making.
For centuries, commodity markets price fluctuations have impacted not only global and domestic firms but also directly influence nation’s and people’s lives. This trend is expected to continue, so keeping abreast of commodity markets dynamics is critical.Global markets are experiencing yet another challenging period while most of the largest economies around the globe are tackling a range of issues. Last month China, the main commodity consumer in recent times, experienced the fastest decline in its factory sector in seven years. The Yuan’s devaluation further highlights that global economic conditions are worsening and creating more pressure on commodity markets. Rising uncertainty in the Middle East and Africa has reduced investor confidence resulting in huge fluctuations in assets owned by global commodity players.
Commodity company earnings on a global basis are under pressure thanks to the lowest prices for a decade across the entire commodity spectrum; from energy baskets to base metals, with significant lows in oil and copper. In this environment minimising costs and responding more rapidly to changing demand is increasingly important. CFOs and CIOs are increasingly exploring restructuring and looking for ways to reduce costs. Options for tackling these bearish market trends by improving operational costs, strategic transformations, lowering dividends, boosting production or eventually raising equity or disposing assets.
At BJSS we are responding to our client’s needs by adapting our commodity propositions and leading transformational methodologies. These enable our customers to better manage current industry challenges by reducing operational costs and leveraging the latest technologies to increase organisational agility.
This is problematic for both banks and trading houses. In the context of on-going regulation and structural change, organisations will need to invest in IT to maintain their competitiveness and fulfil their fiduciary obligations. Similarly, those organisations that are able to move quickly to capture M&A or market opportunities will require strategic IT agility too.