Trading in the time of war

What commodity businesses can expect from the ongoing disruption in trading and risk management caused by the Russia-Ukraine conflict

The ongoing Russia-Ukraine conflict left the world stunned. The swift ‘military operation’ sent shockwaves through the markets with stocks tripping and oil prices soaring. This just goes to show how in geopolitics, things can change at a moment’s notice.

Political uncertainty and volatility affect economic activity. This means the conflict will have the double-impact of slowing economic activity and rising commodity prices, the latter is already in motion. In this blog, we underline the developing situation and how commodity businesses can protect themselves in the ensuing market mayhem.

The effect on commodity businesses:

  • Brent crude oil soars past $100/a barrel
  • Global stock markets crashed
  • Russia, a significant player in energy markets, reduces crucial natural gas exports resulting in spikes and higher energy prices throughout Europe
  • Upcoming grain shortage as Ukraine and Russia are the world’s largest suppliers of wheat and corn
  • Sanctions on Russia increasing by the day, freezing its assets, halting its banks’ access to European financial markets
  • Constant changes and disruptions on an hour-to-hour basis

Disruptions have become a norm and occurring at a higher frequency than ever before. A singular event can shake up the entire market as we know it, and that’s just on a regular day. That said, is it possible for commodity businesses to protect themselves from the speed at which market changes when hit with such geopolitical events or disruptions at large?

Absorbing disruptive events to effectively handle trading and risk management will require businesses to gain timely, relevant and actionable market and operational insights across their entire supply chain. This will include mapping early warnings of potential supply bottlenecks, inventory changes, timely identification of shifts in intraday P&L, non-optimized physical assets and such.

Without sophisticated cloud solutions, managing the flood of data arriving at your doorstep could overwhelm resources. Going by the speed at which markets are moving, manually consolidating this information could result in commercial decisions based on data of increasing vintage.

The best bet to stay on top of market disruptions is digitalization. Forward looking companies that invested in the cloud are in a better position to consolidate relevant data on time, analyze, predict, and make better decisions to manage disruptions.

Here’s how commodity businesses can manage disruptions:

1. Analyzing risk better with accurate hedging

Commodity prices have gone berserk due to conflict in the black sea region. To make spur-of-the-moment decisions, businesses shouldn’t rely on their gut, but on data.

Here’s a scenario: Traders need global insights and information, and the sources of data and information are virtually limitless. Conventionally, when hedging derivatives, businesses would earlier manually look at fluctuating prices on spreadsheets. This is a tedious and time-consuming task. Markets are nervous, and everyone’s on the edge watching frequent intraday price movements of 10–15%. In fast moving markets, fluctuating prices need to be analyzed at a granular level, and with higher frequency — it isn’t something you can accomplish via legacy systems or spreadsheets for that matter.

Cloud solutions not only let you connect necessary data from external price sources, but also disparate systems and spreadsheets, and it’s an instant connection in most cases. Combined with analytics with built-in commodity specific nuances, you gain accelerated insights from huge data sets stemming from multiple systems and data sources — allowing the earliest possible identification of market moves, emergent opportunities and impending risks.

2. Forecast better with simulations

In war, there is no telling how markets will perform without analyzing historical data. You want to look at how markets or the company’s portfolio performed last time there was a conflict of this level. You want to simulate ‘what-if’ scenarios on the current position to understand both best- and worst-case scenarios — and then prepare for the worst-case.

Increasingly, analysts relying on spreadsheets are realizing that they are barely able to keep up with frequent shifts in markets. Yes, simulations and what-if scenarios can also be baked into a spreadsheet. Let’s remember though, these involve complicated calculations and manually updating data is always prone to human error — nobody wants to get it wrong, especially in situations like this.

Here’s a scenario: Suppose tomorrow the price of crude oil is increased by 10%, or if the war ends in three months, prices of commodities such as grain or crude oil will be 50% higher, businesses with incorrect predictions will suffer a loss on a significant chunk of their portfolio. Eka’s Position and Mark-to-market solution not only connect to all disparate data sources -external and internal — and consolidated relevant data so you have that one true picture into your position, but it also lets you execute scenario-based analysis at the click of a button on that data.

3. Make critical business pivots faster with configurable solutions

Being able to quickly pivot and create new business entities is essential for commodities businesses.

Here’s a scenario: Turkey and Egypt are the biggest wheat importers. Suppose an agriculture firm based out of Egypt is used to bulk of its imports coming from Russia. With sanctions in place, importing from Russia will not be an option for a while. Now, the business needs to quickly pivot and identify new regions to procure grains from — it could be Brazil or even Australia considering the latter’s bumper crop year. This will involve adding region specific rules, shipment routes, vendors and so much more. You need a solution that allows you the flexibility to add all this to your existing tech infrastructure so that you don’t resort to using spreadsheets. Investing in a point solution will not work in the longer run.

This is where platform-driven cloud solutions by Eka can help. Not only are the solutions rich in functional depth, cutting across multiple asset classes, but it’s also flexible and designed to enable businesses to add more users, geographies and more and not wait for months to get up and running.

Conclusion

Events such as the Russia-Ukraine conflict have the potential to send markets over the edge and commodity businesses need to be as quick as lightning to keep up. Businesses that invest in building resilience into their operations, like those provided by platform driven cloud solutions not only stand to gain from speed but also from the opportunity to make critical pivots necessary at the speed of markets

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