Blockchain challenges price reporting agencies

06 September 2018 17:42 Source:ICIS Chemical Business

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Marcos Alvarado/Alamy

Price reporting agencies in chemical markets must develop analytical expertise and tools to adapt to blockchain technology

Price reporting agencies could see their traditional roles in chemical markets challenged by the rise of blockchain technology.

Blockchain – where market participants share transaction and supply chain data in secure and verified online ledgers – offers the prospect of making all trades visible to the market. Buyers and sellers of chemicals could no longer rely so much on the price discovery and benchmarking role of agencies.

Price reporting agencies would need to adapt their business models to offer more analytical tools and analysis of factors driving market dynamics as well as offering insights into future market trends and direction.

Although blockchain is in its infancy and is yet to be adopted in chemicals, agencies such as ICIS are already responding to customer feedback by focusing heavily on the development of analytical tools and expertise.

According to Stephen Kok, project leader at Boston Consulting Group, blockchain means any market participant would have full transparency of trading, giving them the ability to aggregate and judge market prices by themselves.

He said: “Agencies will need to enrich that data and create a premium out of the data. They will need to move beyond just collating trades together and informing about the latest benchmark price on the basis of the volume of trades: that will be available to all participants in a much more transparent way.”

Kok believes that, blockchain aside, there is additional risk for price reporting agencies from increasing levels of liquidity in trading across many commodities, including chemicals. Increasing levels of liquidity will give more transparency with higher trade volumes and more use of derivatives helping to drive this.

“In a market mechanism where you have full transparency of trade flows and very good visibility of trade, that [price reporting] value is eroded.”

A new report by Boston, A reality check for blockchain in commodity trading, highlights the world’s most “hyperliquid” markets of equities, foreign exchange, financial oil and gas, carbon dioxide and government bonds where blockchain-based trade tracking and execution systems are already being developed.

Chemicals and other less liquid commodities are less prepared for blockchain because they do not yet have highly electronic and standardised market mechanisms in place. Most chemicals trade is currently “over the counter” (OTC) with buying and selling between two participants without others being aware of the price. According to Kok there are also very poor levels of standardisation across chemical value chains.

“But the chemicals sector is moving towards more standardised trade often driven by regulations between regions. These could form a dataset to support the market,” he said.

He believes that all participants in an industry – including producers, traders, shippers and financers – would appreciate more transparency. Blockchain would provide this with better verification for ownership and more transparent traceability of goods as well as trades, creating a better end-to-end visibility of trade flows.

But for this to work the industry would need better alignment between different geographical and political jurisdictions, as well as standards and protocols. This would be necessary so that you could codify the market into a platform and let the platform operate as an intermediary between all the participants.>

He adds: “The chemicals industry has already invested quite a bit in systems, platforms and bilateral regulations to drive further efficiencies in the market. Participants would have to believe that it would be worth disrupting its value chains in order to have better use of the data.”

CURRENT ONLINE MARKETPLACES

He questions whether existing types of online marketplaces such as Alibaba can become liquid enough to offer a full perspective of price trends and arbitrage opportunities.

Instead, to be effective and efficient it would be better for entire sectors of the industry to conjoin and disrupt themselves through the better use of data.

“With blockchain similar architecture can be used to trade different types of data in a very transparent way across different parts of your value chain.”

HOW TO SET UP BLOCKCHAIN

A blockchain has to be organised between market participants and Kok suggests industry consortia could be an effective way to achieve this. He gives as an example EuroClear and Swift which provide the infrastructure to enable more efficient international financial transactions. These are owned and controlled by industry consortia to provide a service which benefits the entire sector.

“You need to look at constructs of that sort because it will need to be – in some shape or form – governed,” said Kok.

In financial services, gas and electricity, consortia have already been formed to organise market mechanisms of different types. For blockchain to be effective this needs to be scaled up so that it will work for a big proportion of the industry.

WHY BOTHER?

To go through the pain of disrupting and reorganising market mechanisms for blockchain there needs to be a compelling justification. Industry participants have to be convinced that creating a more transparent and efficient marketplace is worthwhile.

Kok believes that OTC markets like chemicals stand to benefit most from the technology because they are inefficient compared to, for example, high volume, transparent equity markets. “For illiquid markets where you have few suppliers and multiple buyers you could have the buyers driving this as a mechanism to drive more purchasing power, or standardisation or distribution of roles, responsibilities and powers. Where you have multiple participants it’s more about driving optimisation of the market flow.”

TRADITIONAL CONTRACT NEGOTIATIONS

Blockchain itself will not disrupt existing supply contract structures where unique, bespoke deals are often negotiated. However, digitisation and standardisation of trade will and blockchain provides a good opportunity to drive change, says Kok.

“A data platform necessitates standardisation at the end of the day. Participants would have to agree that there is more value in moving towards more standardised terms of trade. Then you would slowly migrate from OTC bespoke to OTC standard to drive better value and less price discrepancies. That’s not blockchain, it’s just a force to drive more liquidity and transparency in the market.”

WHAT IS BLOCKCHAIN?

Blockchain is a distributed database – rather than being stored in one place and dominated by one party, it has many participants. The data is immutable so it gives high levels of trust and transparency without the need for a central authority to vouch for the validity of the data.

It is called blockchain because new blocks of data are chained to each other. To add to the data you append what is there. It is immutable because it hosts all the history of the transactions. So you cannot change or erase data, just add or append.

DATA REPOSITORY

Blockchain has the potential to create a repository of data that could act as the basis for a market-place. All players in chemical supply chains – producers, traders, buyers, logistics, financiers – would be able to access the ledger showing the trades and prices. Different types of ledgers re-cording financial, logistics and supply chain data could interact with each other.

Blockchain is emerging across many industries including commodities trading. But none have scaled enough to disrupt any industry. Participants usually form consortia to organise blockchain.

By Will Beacham