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Singapore commodity traders need to digitalise or lose out
WHILE physical commodities trading is booming in Singapore, it risks a downfall if it does not digitise. Having topped the Global Enabling Trade Index (ETI) published by the World Economic Forum (WEF) and the Global Alliance for Trade Facilitation five times, Singapore is considered one of the world's most open domestic markets. Because of this, the nation-state's commodities trading sector has maintained its growth, generating US$900 billion in turnover in 2016 and US$1.2 trillion in 2017. Last year alone, the industry also created more than 15,000 jobs.
These results highlight the significant role that commodities trading plays in solidifying Singapore's position as a key trading hub globally, while keeping South-east Asia front and centre on the world stage. But how long can the nation-state hold its leading position?
One thing that we know is that global trade dynamics will continue to evolve. The key question for Singapore's traders is: Can an industry that has performed well for so long continue to do so while still being run traditionally, in today's digitised world?
CHANGE IS LONG OVERDUE
Though contributors to a multi-trillion-dollar industry, commodity traders have traditionally found safety and reliability in extensive documentation and lengthy paper trails - all at the cost of efficiency. While new technologies to improve the industry are available, trading is still not as seamless as it could be as many players are not fully embracing them. For example, while administrative processes such as record-keeping, form-filling and submissions have been digitised, they have not been integrated across the ecosystem and the functions still operate on independent platforms that are incompatible with each other.
With the number of requirements involved in dealing with multiple stakeholders - be it individuals, vessels, companies or countries - the average process that goes into completing a commodity trade transaction can be complex and frictional with bureaucratic and administrative tasks.
For instance, while processes of completing a trade might be similar across players in the ecosystem, each party is required to submit different types of documentation depending on the purpose. This amount and type of paperwork required - be it physical or desktop-based - increases the margin for errors and inconsistencies, which can, in turn, cause delays in trade and escalate costs overall.
Trust can also be a major challenge. With multiple international parties involved, it can be hard to ascertain if documents have been tampered with throughout the communications process. Take, for example, the simple, yet effective fraudulent practice of invoice spoofing - a practice in which physical invoices are intercepted and bank account details are changed, redirecting where the payments are finally made.
To reinforce Singapore's status as a well-connected and efficient trading hub, local firms need to recognise that technology is a great enabler of trade, and can bring peak efficiencies to the overall process.
Specifically, I believe that blockchain technology can be the answer to streamlining and strengthening it.
Blockchain is an open, distributed ledger that can record transactions between parties efficiently and in a verifiable way. Platforms that are built on it are securely encrypted, do not need to be controlled by a central party, and can be made accessible to all participants.
In commodities trading, a platform like this could serve as a trusted tool for trade documentation and could help users keep track of assets including commodities, cargo and paperwork, including contractual agreements. In doing so, it can reduce the reliance on middlemen across the supply chain, from trading, to logistics, and even financing, ultimately leading to cost-savings for all stakeholders including consumers.
Blockchain can also play a crucial role in building and maintaining trust between parties, no matter where they sit in the world. With the advantages of it being secure, with documents accessible and immutable, not only does it standardise procedures, but it also enables traders to manage and settle transactions reliably and often in real time.
Imagine a scenario in which you, as a business, could enter into a highly complex contract with another company and fully trust that all its most intricate terms and conditions (even the seemingly hidden ones) are constantly upheld and enforced automatically, without the need for any third parties to step in.
This "smart contract" is the future of the industry, where buyers and sellers enter into any agreement with full clarity and complete trust that all terms will be honoured. This will only make trading easier and more reliable, particularly in a rapidly evolving industry where transparency is often the one commodity that is in short supply.
TOWARDS SINGAPORE'S FUTURE
As a recognised trading hub on the world stage, Singapore is in a unique position to lead the overall growth of global trade, from its advantageous geo-location to its time zone which allows traders to complete a 24-hour trading cycle. Not only that, but it is also home to the top global commodities players across metals and minerals, agri-commodities, and energy and chemicals.
Singapore also has infrastructure advantages. Its state-of-the-art digital infrastructure has already laid a solid foundation for its digital economy, which is expected to contribute US$10 billion to Singapore's gross domestic product (GDP) by 2021. This has also helped to successfully establish the country as a smart financial centre, bringing convenience and cost benefits to merchants and consumers within an increasingly cashless society.
This position is why Singapore needs to lead the adoption of new technologies such as blockchain within the commodities trading industry.
Beyond making processes more efficient and building trust between stakeholders, having the industry operate on blockchain would also encourage synergy and cooperation between international parties and Singapore firms looking to expand and trade overseas.
With its high turnover for the Singapore economy, offshore trading represents a truly valuable opportunity for local firms looking to grow and take their business across borders, and we want to support them on this journey.
I foresee a future in trading where transactions will become more seamless, and traders across the globe will conform to one digital standard around which a strong and long-lasting ecosystem will be built. And I am confident that Singapore, consistently placed at the top of the WEF's Enabling Trade Index, will have a leading role to play in influencing the future of global trade.
- The writer is chief executive officer, Commodities Intelligence Centre