Green finance package raises ambition but disappoints on gas

The way we carry out transactions, nationally and internationally, is changing fast. After the commodity trade volumes declining during COVID-19, global trade is booming. Recently trading volumes have increased and commodity prices have been growing and many are talking about new commodities supercycle. This has put significant pressure into global supply chain, global shipping volumes and shipping costs have sky rocketed. The increase in global trade in commodities has been so large in recent months that many are comparing it into China growth fuelled supercycle during the 2000s, writes Colin Stevens.

The multi-commodity trading industry is already a complex global ecosystem with numerous stakeholders, intermediaries and banks operating together to make deals happen. Business deals are massive in value and happen very frequently; it’s a high volume, high-stakes industry. With 20 million or so containers afloat at any given time across the world’s oceans, transporting more than $20 trillion of merchandise over the course of a year, smoothly running supply chain and trade-finance processes are essential to keep things moving. The volume of cross border transactions has been growing steadily at 6% for years now, and the international payments industry alone is worth $200 billion.

The over-stretched global supply chain is now impacting to deliveries. Due to rapid growth in trade there is now shortage of shipping capacity and shipping containers, port congestion has become increasingly frequent and shipping industry is seeing the biggest jump in lost containers in seven years. More than 3,000 containers dropped into the sea last year, and more than 1,000 have fallen overboard so far in 2021. These are all causing major disruptions into global supply chain.

The over stretched global supply chain also ultimately impacts on end user companies who use raw materials produce finished goods. Since 1950`s global companies, as a part of their strategy to cut the production and supply chain costs have moved part of their manufacturing into lower cost countries such as China. Meanwhile, Europe has become increasingly place where final product assembly is taking place. This has significantly increased trade between Europe and China but also dependence to effective global supply chain. At the same time, global companies have adopted “just in time” methodology in order to reduce inventory and cash tied into working capital. The combination of complex global supply chain and lower safe stocks has made the global supply chain increasingly vulnerable for disruptions.

COVID-19 has also brought into attention the global supply chain vulnerabilities. We have seen that in supply chain delivery issues for medical devices and more recently raw materials to manufacture COVID-19 vaccine. Similarly, the global supply chain vulnerability is impacting the commodity trading industry. One key problem in the global supply chain is the lack of visibility where the goods are and when they are expected to arrive to final destination. Commonly end user companies have a six-week window during which the goods may arrive and meanwhile they do not know where their goods are and whether or not they will arrive in time. Further problem with soft commodities is that they often have limited shelf life and they have to be transported in certain temperature and humidity conditions to prevent damage to the goods. Today, there is little end user visibility and certainty that their products are transported in agreed conditions.

COVID-19 has also changed how companies can finance their global trade transactions. Over the year banks dominated trade finance and bank were the primary source of financing for trade transaction. Due to large trade transactions, banks traditionally lent money to traders or end users for six to nine months, while the physical goods moved from producer to the end destination. Over the years, however, banks become increasingly unwilling to lend money trade finance and recently during the COVID-19 epidemic, two major banks, BNP Paribas and ABN Amro have closed down their trade finance desks in Geneva, a major commodity trading hub. As a consequence, there is now shortage of liquidity providers to global commodity trade.

Traditionally trade finance transaction were largely handled by international banks, who had little insight and interest into physical goods. Meanwhile, global supply chain had large number of digitalisation projects which we disconnected and could not provide end-to-end visibility and traceability to the global supply chain. LGR Global is a FinTech and InsurTech company that was set up 2021 to integrate and digitalise the commodity trade between Europe and New Silk Road countries. By creating SRC business ecosystem, LGR global was able to integrate end-to-end global supply chain with trade finance and achieve higher level of interconnectivity and automation. When traditional banks after issuing Letter of Credit (LC) contract, reactively waited that the physical goods and all trade finance related documents have arrived before they started reviewing the transaction for payment. SRC business ecosystem on the other hand issues digital LC in blockchain and uses smart contracts to process and validate global supply chain documents as on going process. This allows detecting delivery discrepancies, document frauds and even container brake ins, fire or drop damages in real time. This is a major improvement to current practice where vast majority of trade finance documents are paper-based, moving from one country to another using 24-hour courier services. In fact, it is estimated that 4 billion pages of trade and trade finance documents are currently in circulation.

LGR Global has designed and developed a secure and controlled business environment that revolutionizes the way international trade is executed and realised. In SRC Business Ecosystem we are connecting global supply chain with trade finance and money movement to create multi-dimensional view of the trade. In our Ecosystem we are connecting buyers, sellers, traders, banks, insurance, shipping, freight forwarders, port authorities and government together in a secure ecosystem where transactions are fueled by SRC (Silk Road Coin). This allows us to reduce total transaction costs to all trading partners.

SRC Business Ecosystem is designed to provide traceability of goods, prevent damage and delays of goods delivery, digitalize document collection and validation, increase transparency, stimulate economic growth, and drastically improve money movement capacities in this exciting and fast-growing market. We use smart contracts that power the real time document validation and finance transactions, and digital twin scenario planning capabilities to better manage trading risk, provide better compliance and manage supply chain and trade finance disruptions when external conditions change. Quantitative and qualitative analysis dictates that at least 80% of relevant stakeholders within the trading commodity finance market will be primed to plug in and use the SRC business ecosystem.

LGR Global CEO Ali Amirliravi told this website: “The commodity trading and trade finance industries have shown us an appetite for next-generation, digital solutions. However, piece-meal applications simply don’t fit the bill – our SRC controlled business environment is a comprehensive solution that has been built from the ground up leveraging industry insights and market-leading technologies.”

The transformation from old manual paper based systems into digital can revolutionise how companies do global trade. While currently end user companies had hardly any visibility to their supply chain, and they have to have large safety stock to safeguard their production operations, which ultimately led to high working capital levels. In SRC business ecosystem end user companies can now better plan, monitor and manage their global supply chain with real time visibility and traceability, which helps them to reduce excess inventory and total working capital.

While currently, end user companies have little visibility or control over whether or not their food or other perishable goods were transported safe temperature and humidity conditions in the global supply chain which leads to high level of product wastage. In the SRC business ecosystem companies can plan, monitor and manage their perishable goods global supply chain and if there is disruption such as temperature or humidity level suddenly increasing, system automatically alerts the end user and freight forwarders, so the problem can be prevented. This will improve delivery certainty that goods arrive in given time and good conditions. This way companies can reduce product wastage, need for excess inventory which helps organisations to meet their sustainability targets.

From trade finance, supply chain finance and money movement perspective, when companies traditionally had to rely on international banks, and bureaucratic, highly costly, slow and unreliable service. In SRC business ecosystem, due to integration and partnerships, companies are able to better manage their supply risks, shipping risks, credit risks, currency fluctuation risks and compliance risks. They have also flexible access to liquidity and different banking instruments either directly from LGR or through pre-qualified trading partners in the SRC business ecosystem. This allows companies to improve their operating efficiency and reduce transaction risks and costs.

The are many benefits to both client company finance and global supply chain leaders. First, better end to end visibility allows better planning and management of global supply chain which again improves delivery certainty that the row materials arrive in time and in good conditions. This frees up liquidity, reduces excess inventory and working capital while better safeguarding against global supply chain disruption.

Second, by integrating trading partners in the SRC business ecosystem, the client companies are able to reduce and manage trading risks such as credit, market, operational, compliance and currency fluctuation risks. Furthermore, if e.g. goods are damaged during the transportation, buyer gets to know it in advance and the data from SRC business ecosystem can help insurance companies in claim processing.

Third, due to higher transparency and lower risk in the SRC business ecosystem, customer have access to more flexible, low cost supply chain finance that allows organizations to better manage their cash flow. Fourth, due to end-to-end global supply chain insight, organizations are now able plan and manage their global supply chain better towards sustainable development and environment impact goals such as reducing carbon footprint. Fifth, the SRC business ecosystem allows continuous improvement of companies global supply chain and trade finance operations by providing historical and benchmark data and suggestions for improvements.

 “While the pandemic has caused a lot of negative effects on the global scale, a potential positive impact is that it has made clear to the industry and the public at large that changes do need to be made to optimize processes and improve the overall functioning of international trade, trade finance, and cross-border money movement.”

Looking ahead to 2022 and 2023, the SRC Business Ecosystem is set to be extended with the creation of its FI liquidity, commodities and insurance marketplace and implementation of new products such as digital twin.