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BJSS Industries: Commodities

A BJSS system is used to trade 250,000 bales of cotton every day.

Economic pressures, market regulation and new technologies are reshaping commodities trading companies.

BJSS has delivered many successful engagements to several clients in the energy and commodities trading sectors. Assignments we have been involved in include implementing and integrating CTRM systems, architecture optimisation, bespoke software development and the provision of expert advisory services in the development of strategy, roadmaps and business cases. Our experience spans the energy supply chain – from strategy and market entry, regulation and compliance, governance and risk management, operating model and architecture design, to custom or package-based systems implementation and integration.

Amir Soufizadeh

Practice Lead: Commodities

I’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.
Amir Soufizadeh
Amir Soufizadeh
Practice Lead: Commodities

Thought Leadership: Commodities

Transformed EU Utilities Business Models & IT

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.

The Importance of Trading!

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.

Commodities Overview - Where is it heading?

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.

Commodities Trading is in a state of Flux

Over the last few years, increased regulation has reshaped the competitive landscape. Many of the ‘full service’ banks have throttled back on their trading activities as part of a strategy to reduce their regulatory capital requirements and focus on less risky business. Regulatory reform has not fallen evenly on all market participants, as the non-bank entities are able to operate with less stringent capital requirements. This is likely to accelerate the current trends in market structural change. However, the banks and specialist trading houses which remain, have experienced growth in trading volumes and investor assets under management. Unfortunately, unfavourable market conditions have reduced revenues: the top ten investment bank commodities businesses across the globe have seen revenues fall from $14.1bn in 2008 to $4.5bin in 2013. This has inevitably resulted in a need for improved cost management. In many organisations this has resulted in headcount reductions (more than 20% between 2010 and 2013) and greater scrutiny of capital expenditure programmes, including IT investment. Cost Management and efficient use of organisation resources will be a strategic priority for all trading organisations.

  • Processing cost per trade (CpT) is significantly higher for commodities than any other asset class.
  • Challenges to realise efficiency will be specific to the size and volume of the trading organisation.  (E.g. typical IT CpT ranges from 36% of the operations cost for high volume participants to 98% for low volume).
  • Focus will need to be on both IT investment and business process improvement to realise a lower CpT.

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.

BJSS Commodity Successes

Dodd-Frank Compliance

BJSS assisted a global energy trader to achieve Dodd-Frank compliance and maintain its ’License to Operate’. A cross-functional governance board including stakeholders from  IT, legal, business and compliance functions was established to engage with internal Subject Matter Experts and the regulatory authority to clarify requirements. A dedicated leadership team of BJSS Consultants comprising Project Manager, Business Analyst, Technical Architect and Test Manager assembled and analysed requirements, and then delivered the solution. Particular attention was paid to risk, issue, and dependency management enabling the client to achieve US and EU compliance requirements.

Trade Control Platform

BJSS took responsibility for a programme to replace an existing system for controlling a Global Oil Trading business. An initial tactical release of real time exposure reporting for representative books for each commodity was delivered to ease immediate business pressure. Later releases included deal settlement pricing, integration with the existing ERP solution and replacement of the settlement pricing calculation system, leading to the fully functioned real-time exposure and Global End-of-Day P&L reporting. BJSS continues maintain and support the system which enables real-time, straight through processing of trades, accurate exposure reporting and automated settlement pricing.

Oil Deal Capture & Scheduling

BJSS was retained by a global oil and gas company to replace a legacy mission-critical system. The system which captured both on and off exchange deals (outrights, futures, options, deliverables and non-deliverables) had reached the end of its life. BJSS developed a scheduling solution while also devising its hardware requirmenents and architecture. Due to aggressive deadlines, the BJSS Enterprise Agile approach was deployed, thereby quickly delivering the solution which enables front office operators to schedule physical oil movements around the world.