In August, the S&P Dow Jones Indices, which monitors the 30 companies that make up the Dow Jones, announced Exxon Mobil (XOM), Pfizer (PFE), and
Raytheon (RTN) were getting the boot before the market opened on August 31. The three companies that replaced these historical titans were Salesforce (CRM), Amgen (AMGN) and Honeywell International (HON), and do not have much in common other than being deeply
embedded in the software era.
Energy now makes up just 2.5% of the S&P 500, compared with 6.84% five years ago, and 10.89% 10 years ago. Technology has jumped from 18.48% of the index in 2010 to 28.17% today, symbolic of the changing
tides. How do incumbent commodity companies change, and ultimately increase their value and thrive in this new environment?
A Cloud-first world
We’re living in a cloud-first world. While many would say software is eating the world, we think that’s only half the story. The Cloud is powering the future of software. At current
growth rates, the Cloud could penetrate nearly all enterprise software in a few years. Silicon Valley’s Bessemer Ventures expects the cloud to penetrate 50% of enterprise software by 2025. At
the same growth rate, we predict that the Cloud will power over 75% of software by 2030.
The global economy has 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 “The enterprise is entering a new ‘post-digital’ era, where success will be based on an organization’s ability to master a set of new technologies that can deliver personalized realities and experiences for customers, employees and business partners.”
Commodity trading firms have long treated technology as a non-core process. However, technology is the new competitive frontier as businesses are becoming encoded in software. The commodities sector will need to embrace this digital future to survive, as
it brings multiple advantages, such as access to a network, improved information, pricing and other data points. There are also multiple benefits across transactions and pre and post trade processing. In particular, for commodities such as natural rubber,
the use of digital technologies improves transparency and can support improved sustainability practices across the supply chain, a significant move for ESG goals.
The future of digital commodities markets
- Past: Cheap funding — relative to emerging economies
- Future: Value will be provided with a focus on core business and outsourcing the rest to others.
- Prediction: Company size will no longer be a limiting factor. Shopify and Stripe have
powered the mushrooming of small businesses.
- Past: China — unprecedented growth and an insatiable appetite
- Future: Boom of smaller businesses
- Prediction: China and other frontier markets will still drive growth in the consumption of raw materials. However, this time it will not be concentrated in one country. Furthermore, as countries shore up their own supply chain lines and increase
protectionism, they will rely increasingly on diversifying their raw material supplies. This will also include supporting smaller businesses to boost GDP.
- Past: Proprietary information — information discrepancy that gave asset owners an edge
- Future: Data and content creation as power
- Prediction: Information and data will be used in two prongs:
- As climate change becomes more than window dressing, there will be increasingly more pressure to track the provenance of cargoes.
- In the AI economy, companies who own and are the venue of data and content creation will emerge as the ultimate victors.
- Past: Opacity — leaving the industry largely unregulated
- Future: Transparency will weed out limited value-add beyond cheap access to capital. Innovation will be a true driver of growth
- Prediction: The key to flourishing in the new economy will be true focus on serving the customer and company structuring. We predict that some companies will choose to focus on niche sectors to create differentiation. Others will choose
to keep costs as low as possible by outsourcing non-core trading functions.
- Past: Fragmented world
- Future: Open source and collaboration propelling growth and creating value.
- Prediction: Companies who embrace that collaboration actually adds business value will find faster growth than closed mindset peers. We have seen this in the last decade:
- Blackberry Messenger vs Whatsapp
- Microsoft: purchased LinkedIn and GitHub after years
of being a closed limited solution.
Across the commodities markets, some are digitising more quickly than others. Those who thrive in the future are the ones who support the digitisation of this market where all parts of the value chain can derive value from improved market information.