One particular trend we’re seeing increasing activity in is that of emerging economies who produce specific commodities looking at ways to ‘reclaim’ some of the ‘value add’ that occurs around the commodities supply chain which today benefits the large, international infrastructure providers. Many commodities in emerging economies are produced (mined, grown, etc.) locally and yet their end-products are consumed and used in first world economies (sweeping generalisation I know, but bear with me).
After all, if you think about it, the majority of commodity derivatives contracts are operated by the global exchange groups, and the ratio of the value of the underlying commodity to the value of the trade (derivatives, financing, logistics) that takes place post-production, the so called ‘displaced’ value, is significant.
We know of a number of initiatives where NGOs and governments are seeking to establish new exchanges, contracts or platforms to retain (or reclaim?) the value around commodities that are created within their geographies.
However, they face significant challenges, including the fact that the established financial players on commodities are typically located in places such as London, Chicago and Switzerland. There is also a paucity of secure available capital to inject into such markets. And the ability of the established players to compete means new ventures have to capture market share quickly or innovate in order to succeed.
One area where new markets can compete is when their initiatives are enabled by disruptive technology. New models and electronic platforms, especially when implemented with agility, offer the chance for these new offerings to be operated cost effectively and to provide real benefits such as price setting (as opposed to ‘price taking’), financing and trading.
We are expecting to see more and more emerging economies taking advantage of disruptive, rapidly implementable and adaptable technology to launch new trading and financing facilities for the commodities produced in their locality, often partnering with FinTech providers.
Whether these represent a real threat to established exchanges is yet to be seen, but some change is inevitable.