Evolution of Commodities Risk Management

by Ed Scicluna and Brad Knox

The commodities landscape has undergone significant change over the past 24 months. Firms that have placed an emphasis on enhancing and future proofing their risk platforms have performed exceptionally well, particularly navigating the volatility of the global markets.

Three critical components that businesses have focussed on whilst reconfiguring their risk framework have included hiring, dedicated risk platforms for specific product categories and the development of more sophisticated risk professionals.

From a holistic perspective, we have observed a sharp uptick in hiring across the risk management spectrum. Part of this trend has been driven by new market participants that have been lured into the market by the commodities super-cycle. These new entrants have invested heavily in hiring experienced risk professional to assist them in building robust risk practices.

Established commodity firms have placed a significant focus on growing and reconfiguring their risk management teams to mitigate the volatility across the global markets. Given the demand for high performing talent, businesses are being forced to innovate to attract and retain the best risk professionals. We have witnessed the transition of traditional risk reporting to Middle Officers & Product Controllers whilst aligning risk more closely with the commercial trading teams. As a result, risk frameworks are evolving and becoming more sophisticated. This has also impacted business operations and led to the implementation of more robust analysis and tighter VaR control.

Technological advancements and the digitalization of trading platforms has also impacted the configuration of risk teams and individual responsibilities. Mid/Senior level risk positions are becoming more quantitative in nature as risk analytics play a more paramount role in trading strategies.

Finally, we have seen a number of firms modifying the configuration and compositions of
their risk teams due of the emergence of new products (renewable feedstocks, environmental products, etc.). The infancy of these markets has created opportunities for less experienced risk and quantitative professionals to transition into leadership roles without having to complete against industry veterans who may have a distinct advantage when focused on more traditional commodities (eg. oil, gas, power, grains and oilseeds).

There are additional factors that are driving the evolution of commodities risk management however the overarching theme is that risk platforms are becoming more sophisticated, more analytically focused, and commercially orientated in order for businesses to thrive in a VUCA (volatile, uncertain, complex and ambiguous) environment. We anticipate the demand for high performing risk professionals will remain constant as the commodities super-cycle continues to dominate the market.

Be sure to follow us on Linkedin to stay up-to-date with all the latest trends and developments taking place across the commodities supply chain space. Proco Commodities remains available to discuss any of the market conditions mentioned above and how we can help you find and retain the best talent for your business. For more insights, click here.