As commodity margins flat-line, the number of traders will shrink as existing trading firms consolidate and digital rivals emerge, U.S. consultancy Oliver Wyman said in its annual commodity trading report.
With the exception of oil and natural gas boosted by volatility last year, growth across commodities is plateauing with combined margins stuck at around $44 billion per year in 2014 and 2015, the report said.
Wyman sees digitisation as the game-changer in the next few years that will force independent traders such as Glencore, Trafigura and Vitol, as well as the trading arms at integrated oil companies like Shell and BP, to become ever more nimble and automate many of their activities.
Little room will be left for mid-sized traders to expand beyond niche markets and it will be "close to impossible for banks to return back to physical trading."
Until now the oil and gas industry has remained largely immune to technology leaps. But while banks trading physical commodities may be a thing of the past, Wyman sees their role as "pioneering blockchain technologies" for commodity financing.
Blockchain works by creating permanent, public "ledgers" of all transactions that could potentially replace complicated clearing and settlement systems.
"The first ones to adopt the new technology, like blockchain, will have a significant competitive advantage," said Roland Rechtsteiner, a partner and energy specialist at Oliver Wyman.
Marco Dunand, chief executive of Swiss-based trader Mercuria, recently told the Reuters Commodities Summit that blockchain payments could slash payment costs in a system stuck in the "17th or 18th century" by some 30 percent.
NEW SET OF PLAYERS
While traditional energy sources and traders will continue for the foreseeable future, "an army of new low-cost digital contenders" is breaking into the power market.
Technology giants like Apple and Google already have energy wholesalers as subsidiaries. Online platforms like Amazon, Alibaba and transport providers like Uber will use revenue from their core services to sell power for far less, the report said.
With Google using an equivalent amount of electricity as is used to power 200,000 homes, it could cut costs with solar power plants while leveraging its wide customer base and expertise in data processing to carve out a share in power markets, it said.
In Britain for instance, once smart meter data becomes available in the next year or so, digital specialists will be able to offer new services, Rechtsteiner said.
Over the last five years, independent traders traded 30 percent more oil, currently averaging 4 million barrels per day (bpd) versus asset-backed traders at 5-10 million bpd. Liquefied natural gas trading has also risen.
Wyman said that while the acquisition of physical assets by independent traders allowed them to grab more market share, they will have to do more and also venture deeper into utilities, particularly from renewable energies, and the trading and recycling of plastics as hydrocarbon use in transport declines.
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