The commodities industry is progressing on the pathway towards digitalisation but what’s next in the digitalisation agenda? And what are the drivers necessary to accelerate wider adoption of digitisation in trade finance? Here are the industry insights from a recent Contour and Commodity’s People webinar “Deep Dives into Commodities Digitalisation: Connecting the Physical and Financial Supply Chain”.
Digitalisation is now a common discussion topic within the commodities industry. Whether it’s about the resilience and sustainability of supply chains or about efficiency in trade finance, this is a conversation that is headed in the right direction.
“We now have the technology and are beginning to build the standards to pull this all together, and there is a good future ahead of us to start digitalising the products we have now,” said Carl Wegner, CEO of Contour.
The drive to digitalise
From the financial supply chain perspective, banks like HSBC, have invested in trade finance technology and are continuing to work with fintechs as part of their digitalisation journey. Iain Morrison, HSBC Singapore’s Managing Director and Head of Global Trade and Receivables Finance, highlighted the availability of many data points, thanks to the emergence of technology on the physical side of the supply chain – from electronic Bills of Lading, tracking and visibility, to bunkering terminals and knowing what’s in each tank.
“There is a continuously growing opportunity for banks to use data points as financing and risk mitigation trigger points, and that is something we’re excited to explore going forward on how technology and data in the physical and financial supply chain can converge,” added Morrison.
Commodity heavyweights like Rio Tinto, have made a big push to digitise many of their trade finance processes in the past few years. Rio Tinto has completed many transactions using Contour’s digital Letter of Credit (LC), most notably, the first Renminbi-denominated paperless iron ore transaction with China’s Baosteel.
“Digitisation of the Letter of the Credit helps us to mitigate a lot of the risks we’ve seen happening recently in the industry, especially in oil and gas – like fraud and double financing. By going digital, we can mitigate those risks, reduce fraud and improve controls on the instrument and make the LC stronger and more effective as well,” said Michel Alves, Commercial Services Pacific Manager at Rio Tinto.
“If you haven’t started digitising your trade finance workflows, start now. Continue to learn about how this new technology is going to help you and how digitalisation is going to help your business.”
– Carl Wegner, Contour
For Oriental Energy and Resources, a Singapore-based petrochemicals company, digitalisation optimises efficiency, translating to better use of their resources.
“We need to spread out our resources clearly and more effectively to eliminate redundancy. The most important part is to limit the communication change, not just internally but also outside the organisation,” noted Mei Qi Cheng, Senior Corporate Reporting Manager at Oriental Energy and Resources.
Cheng also highlighted the ability for better cash flow planning, as the digital LC provides visibility into each stage of the transaction.
“One of the main benefits we are seeing here is in cash flow management,” she added. “We can eliminate all unnecessary delays and action can be taken immediately. That’s the new push point,” she emphasized.
Advancing eBL adoption
One critical development that the participants agree could accelerate the drive to digitalise, is advancing the adoption of electronic Bills of Lading (eBLs).
“eBLs are a significant enabler for financing and of course, primarily, they help streamline the physical supply chain as well.”
– Iain Morrison, HSBC Singapore
“We have seen some trials happening in eBLs and this is a good first step. Next, getting the multiple eBL solutions across the industry to ensure eBLs get more scalable and be an important part of the ecosystem,” said Rio Tinto’s Alves.
From HSBC’s perspective, an eBL is not the silver bullet but an important one.
“As a banker, having a title document that I can check and validate gives me a lot of flexibility in how I can finance and enable support. So I think eBLs are a significant enabler for financing and of course, primarily, they help streamline the physical supply chain as well,” said Morrison.
Whether it’s the eBL or trade finance digitisation, waiting for a legal framework or standard is the main reason many participants are delaying their digitisation journey. Progress on adopting the Model Law on Electronic Transferable Records (MLETR), which is proposed by the United Nations Commission on International Trade Law (UNCITRAL) could drive digitalisation further.
“One of the main benefits we are seeing here is in cash flow management. We can eliminate all unnecessary delays and action can be taken immediately. That’s the new push point.”
– Mei Qi Cheng, Oriental Energy and Resources
The urgent need for the commodity trading industry to digitalise emerged recently with news of Trafigura’s systemic fraud allegations, the latest in a string of scandals to hit the commodity trading industry. In an industry that relies on hard copies of documents or paper-based processes, this leaves the window open for fraud and abuse.
“Digitalisation is a critical part of risk mitigation. In the past, we will archetypally be looking for that needle in the haystack by checking every document. Now, you can use data and artificial intelligence to really zero in on typologies and behaviours in a far more effective way than looking for a needle in a haystack,” said Morrison.
“By going digital, we can mitigate risk, reduce fraud and improve controls on the instrument and make the LC stronger and more effective as well.”
– Michel Alves, Rio Tinto
Digital LC solutions can help mitigate risks like money laundering, sanctions and trade embargoes. In addition, it can also speed up the legally required know your customer (KYC) checks.
“The digitisation of LCs will allow us to have access to the data that would quickly screen out counterparties and automate the processes. This enables us to have a much more efficient screening process,” said Alves.
Starting your digital journey
Cross-border trade is complex, as there are logistical challenges and considerations in the physical supply chain. On the financial side of things, there are many processes and participants – whether it’s the Letter of Credit, Bill of Lading or Certificate of Origin, there are many documents that still need to be digitised.
Today, the technology exists for the commodities industry to further digitise many of these complex processes.
“If you haven’t started digitising your trade finance workflows, start now. Continue to learn about how this new technology is going to help you and how digitalisation is going to help your business,” concluded Contour’s Wegner.
Instead of waiting for other counterparties to join a digital network and other processes to be digitised, the critical thing is to get started and start reaping the benefits of a streamlined workflow, improved working capital and increased efficiencies.