What are the Mega Themes in Commodities Digitalisation?

I chaired a panel at CTILive that explored digitalisation in the energy and commodities markets.  My co-panellists were Vijay Chakravarthy, Global Head of Risk and Internal Audit at ED&F Man Group, Cetin Karakus, Global Head of Quantitative and Analytical Solutions at BP, and Richard Williamson, CEO of Gen10.

Three mega themes emerged from our fascinating discussion – the characteristics of commodities businesses that are winning in the digitalisation journey, the importance of digitalisation to successfully deliver decarbonisation, and the headwinds that may yet impede progress in digitalisation.

Winners in digitalisation

Going in to the pandemic, we saw two camps of organisations – those that were well-prepared and those that were not.  Well-prepared businesses had in place digital tools and workflows to support effective remote working, or they rapidly set these up.  Having embraced cloud adoption, these winners are seeing providers moving ever faster into application and database development and therefore penetrate business competencies like never before.  This is driving change to in-house IT teams and their structures.  While AWS and Azure are huge beneficiaries of these trends, technology teams that can leverage their services, cost effectively, will continue to excel.

Successful technology leaders are focussed on data analytics and AI, and some are doing this very ably, and at scale.  However, others are building shanty towns, with ad hoc solutions, rather than skyscrapers built on agile and based on an appropriate vision and architecture, as Cetin explained.  In fact, winning technology teams are helping their organisations to “disrupt themselves” by identifying and seizing the new market developments and opportunities arising from virtual working.  For example, digitalisation will lead to a plethora of “apps” and “challenger bank” type start-ups that disintermediate parts of the value chain within the large players’ franchises.

Decarbonisation is a game changer

Decarbonisation emerged as a paradigm-shifting theme.  All the panellists noted that it cannot be implemented successfully without digitalisation.  Decarbonisation is associated with falling costs of renewables production and therefore deflationary pressures that undermine current capex-heavy business models.  This will allow new, low cost-entrants to participate in the energy production, and possibly trading, markets, heralding a possible technology-led, market dislocation

These new realities need to be accommodated flexibly by business leaders and their supporting technology teams.  This is especially true in the data management arena, where change can be effected very rapidly when the right approaches are used.

Exciting market opportunities will emerge driven by a host of new imperatives connected with the green agenda.  Some have relatively low capex and engineering requirements, such as demand response technologies, while others require enormous investment, continued technology evolution and ongoing government subsidy, such as carbon capture technologies.  This market dislocation could be driven by geo-political rivalry as the costs of global warming, and its repercussions on voter choices, continue to be felt.

We could see a new “space race” of politically-motivated investment decisions emerge, triggered initially by the need to stimulate economic demand coming out of the pandemic.  Government green initiatives will likely continue to drive funding and investment for some years to come.  This trend will continue at least until the costs of investment can be justified by the likely market returns, which opens up the opportunity for greater levels of market participation in the future.

On the ground, this theme is driving changes to trading, including the automation of shift desks, and the soft commodities lifecycle.  For example, Vijay mentioned that ESG, including the environmental component, is being supported by the transparency and accountability afforded by digitisation, and blockchain in particular, leading to more organic and better food supplies, for example.

Headwinds to navigate

Cyber security is one of the greatest headwinds that may impede the progress of digitalisation.  Cyber threats can be huge, unpredictable and unquantifiable.  Technology teams need to achieve the right balance between fostering open, integrated digital systems while being conscientious and sensible about security, especially for critical infrastructure.  Incorporating security as part of your design, rather than as an add-on, is crucial to success in this area.

Data management is another potential headwind.  In reality, most businesses haven’t truly solved their data architecture and quality issues and are not sufficiently advanced in their data management to leverage their data for AI/ML purposes.  Achieving this requires a degree of standardisation, of both information and process, which is actually an ancient problem in human society.  This in turn is a cultural challenge related to adoption rather than technology or law.  As Richard memorably said, getting this right determines whether we gain true competitive edge or retire to the crab bucket of near term gains.

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