Cloud services usher in the digital age for commodities markets

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In August, the S&P Dow Jones Indices, which monitor the 30 companies that make up the Dow Jones, announced that Exxon Mobil (XOM), Pfizer (PFE) and Raytheon (RTN) were getting the start before the market opened on the 31st. August. The three companies that replaced these historic titans were Salesforce (CRM), Amgen (AMGN) and Honeywell International (HON), and have little in common other than being deeply rooted in the era of software.

Energy only represents 2.5% of the S&P 500, compared to 6.84% five years ago and 10.89% 10 years ago. Technology has gone from 18.48% of the index in 2010 to 28.17% today, a symbol of changing tides. How are legacy commodity companies evolving and ultimately increasing their value and thriving in this new environment?

A cloud-driven world

We live in a cloud-driven world. While many would say software is devouring the world, we think that’s only half the story. The cloud is fueling the future of software. At the current rate of growth, the cloud could penetrate almost all business software within a few years. Bessemer Ventures of Silicon Valley expects the cloud to penetrate 50% of enterprise software by 2025. At the same rate of growth, we expect the cloud to power over 75% of software by 2030.

The global economy learned during the COVID-19 pandemic that digital transformation – largely powered by the cloud – is no longer an option but an absolute imperative. Accenture (2019) reports that “the business is entering a new ‘post-digital’ era, where success will be based on an organization’s ability to harness a set of new technologies that can deliver personalized realities and experiences for customers, employees and business partners. “

Commodity trading companies have long treated technology as a side process. However, technology is the new competitive frontier as businesses are increasingly coded in software. The commodities sector will have to embrace this digital future to survive, as it brings multiple benefits, such as access to a network, improved information, prices and other data points. There are also many advantages to transactions and pre and post transaction processing. In particular, for raw materials such as natural rubber, the use of digital technologies improves transparency and can support improved sustainability practices throughout the supply chain, a significant step forward for ESG objectives.

The future of digital commodities markets

  • Pass: Cheap financing – compared to emerging economies
  • Future: Value will be delivered by focusing on core businesses and outsourcing the rest to others.
  • Prediction: Company size will no longer be a limiting factor. Shopify and Stripe have fueled the proliferation of small businesses.
  • Pass: China – unprecedented growth and an insatiable appetite
  • Future: Small business boom
  • Prediction: China and other border markets will continue to drive growth in commodity consumption. However, this time it will not be concentrated in one country. In addition, as countries strengthen their own supply chains and increase protectionism, they will increasingly rely on diversifying their raw material supplies. This will also include support for small businesses to boost GDP.
  • Pass: Proprietary Information – information discrepancy that gave asset owners an advantage
  • Future: Data and content creation as a power
  • Prediction: The information and data will be used in two parts:
  1. As climate change becomes more than a facade, there will be more and more pressure to track where shipments are coming from.
  2. In the AI ​​economy, the companies that own and are the birthplace of data and content will emerge as the ultimate winners.
  • Pass: Opacity – leaving the industry largely unregulated
  • Future: Transparency will eliminate limited added value beyond cheap access to capital. Innovation will be a real engine of growth
  • Prediction: The key to thriving in the new economy will be a real focus on customer service and business structuring. We anticipate that some companies will choose to focus on niche industries to create differentiation. Others will choose to keep costs as low as possible by outsourcing non-core business functions.
  • Pass: Fragmented world
  • Future: Open source and collaboration drive growth and create value.
  • Prediction: Companies that embrace this collaboration that actually add business value will grow faster than their closed counterparts. We have seen this over the past decade:
  1. Blackberry Messenger vs. Whatsapp
  2. Microsoft: Bought LinkedIn and GitHub after being a closed limited solution for years.

Conclusion

In commodity markets, some are digitizing faster than others. Those who prosper in the future are those who support the digitalization of this market where all parts of the value chain can derive value from improving market information.


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