Commodity risks are emerging as critical differentiators influencing the business growth of commodity traders. Every organisation in the world of commodity trading is susceptible to these risks that generally result in commodity price fluctuations. Commodity risks can disrupt the trading operations of organisations as well as affect their financial performance. Having a robust risk management system in place is thus essential for you to make your commodity trading operations more efficient. A tech-driven risk management approach can also be helpful in enhancing your business’ resilience to commodity risk exposures.
Managing and controlling commodity risks is vital for an organisation to trade commodities easily without exposing the business to unnecessary risks. Commodity trading businesses need to better understand both the cause and effect of price fluctuations.
Commodity trading risk management platforms can provide a detailed analysis of potential exposures as well as their repercussions. This can help businesses in having a great control over their financial as well as operational performance. Following are the top 7 commodity risks that you need to manage and control in order to ensure maximum growth of your business.
1. Operational Risks
Poor management of operational risks is one of the main reasons behind major financial downturns of commodity trading businesses globally. Operational risks associated with commodity trading encompass a wide range of issues including systematic failures or even accounting and data-entry errors. Operational risks highlight the exposures and uncertainties companies face while carrying out their day-to-day business activities.
Operational risks result from disruptions in internal processes or systems. Improper trade management systems can also be a reason behind operational risks. These risks are often based on how an organisation functions and how it manages the everyday responsibilities. Operational risks also include all kinds of exposures associated with the maintenance of systems and equipment.
2. Counterparty Risks
When a trade contract is made between two parties, there is a threat of the other party not meeting the financial agreements. This threat is known as counterparty risk and is an integral part of all financial transactions and agreements. It is a risk that is introduced whenever a party in an agreement defaults on the contractual terms or agreements.
Counterparty risk is widely present in trading markets, being experienced by both big and small traders. A structured approach consisting proper counterparty selection, documentation, and other risk management practices are essential in protecting your organisation from counterparty risks. Failure to choose the right counterparty can result in expensive exposure events that can lead to significant losses for your organisation.
3. Credit Risks
The risk of a loss occurring due to the failure of any party to abide by the conditions of a financial contract is called credit risk. It can also be defined as a risk that the lender may not receive the owed amount from a party it is in contract with. Credit risk is thus a term associated with the dangers of not getting paid for providing commodity goods to a counterparty.
Credit risk generally occurs due to the deteriorated financial condition of the counterparty. This can disrupt the cash flows of the lending party and ultimately, take a toll on their organisation’s finances. Hence, it is important to always have a robust finance risk management system in place to counter concerns of credit risks while trading your commodities.
4. Liquidity Risks
The lack of marketability of a commodity that can’t be bought or sold quickly enough to prevent or minimize a loss is known as liquidity risk. Liquidity risk occurs when a commodity trading business is unable to meet its short-term debt obligations. There are two types of liquidity risks – funding / cash flow liquidity risk and market / asset liquidity risk.
Funding or cash flow liquidity risks refers to the risk that a commodity trading business would not be able to settle its outstanding payments. Market liquidity risk is the possibility of not being able to sell a commodity. This can be because no party is interested in buying the commodity that the commodity trading business is offering.
5. Compliance Risks
Commodity trading businesses are compelled to operate within the numerous rules and regulations surrounding commodity trading activities. Failure to do so may result in huge fines or losses for the commodity trading business. The risks associated with such failures are known as compliance risks. Risks associated with legal or regulatory sanctions and resulting reputational damage are thus known as compliance risks.
A commodity trading business may face compliance risks when it fails to comply with the applicable laws and regulations related to commodity trading. It is important to have a dedicated approach to mitigating the possibilities of these law violations. Stringent commodity trading risk management measures can also help in ensuring that all your trade activities are in compliance. This can assist you in warding off expensive compliance risks.
6. Market Risks
The risk of losses due to unfavourable or adverse price movements is known as commodity trading market risks. The fluctuations in commodity prices lead to this type of risk that has an impact on the entire market. Also known as systematic risks, market risks cannot be completely avoided owing to their unpredictability.
When it comes to market risks, the possibility of risk exposures is generally long-term as compared to that of other risks. All kinds of commodity traders, irrespective of their commodity and size of business, can be exposed to commodity risks. Hence, commodity trading businesses need to employ effective risk management measures to protect their organisation from the concerns of market risks.
7. IT Risks
IT risks refer to hardware and software failure as well as malicious attacks that can affect the continuity of your trade operations. It can even pose the threat of significant data losses with your information exposed to various security threats. IT risks encompass a range of business-critical areas including security, availability, and performance.
From compromising your business data to reducing the productivity of your operations, IT risks can damage the value of your business significantly. Having a better view of your IT risk landscape is essential to ensure seamless functioning of your trading operations. Hence, a powerful risk management system needs to be in place in order to protect your organisation from commodity IT risks.
CommodityPro – Digital Risk Management for Commodity Trading
CommodityPro is a commodity trading risk management platform that offers smart digital solutions to ensure enterprise-wide risk management for your organisation. Our commodity trading risk analytics capabilities can provide you with detailed insights into your trading value chains. This can assist you in predicting and preventing critical commodity risks from affecting your trade flows.
CommodityPro’s tech-driven risk management system digitalises the end-to-end procedures associated with your trading operations. Tech-integration can mitigate compliance risk concerns by ensuring absolutely error-free business documentation. With CommodityPro’s digital risk management solutions, businesses are also provided with a detailed overview of their exposures and financial positions. Contact us to know how we can help you manage commodity risks more effectively.
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