Commodities are hot with gold topping $1,300 an ounce, up from $986 a year ago and rising. Others, like corn and coffee are up more than 50 percent in the past 12 months. Not surprisingly, then, so are companies that cater to the commodities market. London-based Brady PLC, a commodity software company, for example, reported that second quarter revenues rose 29 percent on the strength of its electronic trading platforms, risk management software, settlement systems and interfaces to commodity clearing centers/exchanges.
New regulations have been a boon for risk management systems, which keep tabs on not only price risk but credit and counterparty, operational and market risk, helping to demonstrate transparency and regulatory compliance. Commodities traders are leaving their spreadsheets behind for systems that offer risk metrics in real-time, keeping them informed about exposure and position at any point in time.
Brady’s clients run the gamut from Standard Bank in London to such commodities suppliers as Paul Reinhart AG of Switzerland, a global cotton trader since 1788, which uses Brady’s risk management solution for analysis and reporting requirements, as well as to enable faster pricing calculations and “what if” screens for single-expiry-date options.
Xstrata Copper, headquartered in Zug, Switzerland, implements the technology for trading, risk management, hedging and integrated supply chain management, handling front-to-back office transactions across derivatives and physical metals. It operates mines, concentrators, smelters and refineries in Canada, Argentina, Peru, Chile and Australia, producing such by-products as gold and silver. Koch Supply & Trading, in London, Singapore and Houston, has turned to technology for derivatives trading and handling risk exposure while implementing Brady’s commodities trading platform to interface to the London Metal Exchange (LME) to match and register trades.
“Markets are more liquid, global, electronic and easier to invest in,” says Gary Vasey, an industry analyst who follows the commodities trading and technology markets for CommodityPoint out of the Czech Republic. He’s also the author of Energy & Environmental Hedge Funds — The New Investment Paradigm. He says hedge funds, investment banks, pension funds and family offices have been finding commodities irresistible.
“The types of products traded include electricity, coal, oil, gold, wheat, nickel, and even freight rates,” he says, noting that it’s always been a relationship business. But, the picture isn’t entirely rosy: the credit crisis caused price collapses and problems when investors were unwinding positions to support their other exotic holdings and natural disasters like the Russian drought has wheat prices rising.
Institutional Investor spoke with Brady CEO Gavin Lavelle about how his technology company is benefiting from the boom in commodities trading.
Institutional Investor: How has Brady taken advantage of current market developments?
Gavin Lavelle: Out of the financial chaos of the past two years comes a need for more compliance, more central clearing, and transparency. There have been tectonic shifts in regulations and rules concerning over-the-counter (OTC) contracts that need to be centrally cleared on exchanges. All the talk about systemic risk points to more technology for commodities traders.
In the past few weeks, for example, French finance minister Christine Lagarde urged further regulation for the commodities market. One reason is that prices are soaring — wheat is 70 percent up, sugar’s at a 15-year high and regulators are looking for better control. One investor has accumulated 7 percent of the world’s cocoa — you know people are not going to be strong-armed into paying out- of-this-world chocolate prices.
There has been an active mergers and acquisitions (M&A) market in commodities and your firm has done it’s share of work in this arena.
We have completed two acquisitions in the past eighteen months — Viveo Switzerland SA to strengthen our cross-market solution competency by adding soft commodities, oil, gas and metals and InVivo Group, a global farming co-op in France. I guess you can say we’re developing a track record for identifying and securing good acquisition targets. As for the industry, M&A activity in the commodities trading sector has been buoyant, accelerating growth from stronger combined commodities solutions, strengthening and diversifying existing operations.
You’ve also had investors taking stakes in your company.
Fidelity and AXA Framlington in London have taken significant stakes this year. Brady is cash positive, allowing us to pursue further acquisitions — we have no debt, with basic earnings per share for the second quarter increasing by 43 percent. We’ve out-performed [the Financial Times/London Stock Exchange] FTSE100 index in both year-to-date and for the last three years.
How has Brady evolved since you went public in 2004?
Brady was started by an academic — Robert Brady — of Cambridge University. It was part of Cambridge Science Park and run as a technology incubator. Many felt it could be so much more and new management decided to focus on sales and marketing, taking the company public on London’s AIM — Alternative Investment Market.
Seven of the ten largest AIM companies come from the natural resources sectors, while miners and oil and gas explorers and producers account for one-third the value of AIM. The sector also has seen more than its fair share of takeover activity--we felt it was a good fit. Our revenues have doubled in the past three years.
How can systems put in place in London as the international hub for world bullion OTC trading and the wholesale market for international banks, brokers, fabricators and refiners improve trading?
Recently the LME and LCH Clearnet have launched OTC gold post-trade services for the London bullion market and we’re supporting the trading and clearing of OTC gold forward contracts with our system’s LMEsmart interface. It will match and register trades from the LME, allowing gold forward market contracts to be captured and routed through the LMEsmart, submitting matched bilateral trades to LCH Clearnet for clearing.
This is a key step in allowing organizations to reduce credit exposure and gain margin offsets, lowering operational costs. Future plans are to add options on gold, forwards on silver, platinum and palladium — all to be priced in U.S. dollars. This should minimize systemic risk and create straight-through-processing efficiencies for market participants.
