Blockchain benefits still murky for most commodities trading

Major companies and banks have tested blockchain across commodities such as in power, diamonds, food and oil. (AFP)
Updated 16 August 2018
0

Blockchain benefits still murky for most commodities trading

  • Blockchain, originally the platform behind cryptocurrency Bitcoin, is viewed by some as a solution to inefficiencies
  • Among the obstacles to scaling up the technology include reconciling terminologies and whether the switch to a blockchain platform is even financially justifiable

LONDON: Commodity firms and banks have been diving into blockchain pilot schemes over the last two years but the new technology’s application for most trading has likely been over-hyped, a report by Boston Consulting Group (BCG) said.
Blockchain, originally the platform behind cryptocurrency Bitcoin, is viewed by some as a solution to inefficiencies, improving transparency and reducing to the risk of fraud. But BCG believes its potential has been exaggerated.
A high-tech ledger, blockchain uses a shared database that updates in real-time and can process and settle transactions in minutes without the need for third-party verification.
The volume of trades through various schemes has been negligible so far and it is too early to tell how soon it might reach a critical mass.
“There are so many pilot schemes but none have become real production scale systems yet. One of the problems is that it’s not designed for physical trades. The fundamental issue: how do you track a physical entity in a virtual world? It’s two worlds colliding,” Antti Belt, co-author of the BCG report, said.
Among the obstacles to scaling up the technology include reconciling terminologies and whether the switch to a blockchain platform is even financially justifiable.
“The industry is very old and everyone uses a different language. How do you define quality, shipment schedules ... a lot of reconciliation is currently needed for both sides,” Belt said.
“People have spent millions, sometimes over $100 million, on IT system, do they want to do it again?”
Furthermore, it is uncertain to what degree traders will want to adopt a technology that will erode already razor-thin profit margins.
BCG said that as the platforms take shape, it would be “bad news” for merchant traders as the price inefficiencies and unequal dissemination of information that they rely on to make profits would disappear.
“The use of blockchain solutions would significantly improve transparency ... It would also create a more efficient and liquid market, moving commodity trading away from bilateral deals struck directly between two parties to transactions based on electronic platforms to match buyers and sellers,” the report said.
Co-author Steven Kok said interest in the wider adoption of blockchain technology would start where the primary driver is certifying the source of the asset, as with diamonds, rather than efficiency.
Anglo American’s De Beers said in May it had tracked 100 high-value diamonds from miner to retailer using blockchain, in the first effort of its kind to clear the supply chain of impostors and exploitation.
Nevertheless, major companies and banks have tested blockchain across commodities such as in power, diamonds, food and oil. Last year, a consortium including major banks, trading firms and producers BP, Equinor and Royal Dutch Shell announced that they would develop a blockchain-based platform ready to go by the end of 2018.
Separately, commodities trader Trafigura set up another platform with IBM and Natixis for the US crude oil market last year. Major agriculture traders have also tried blockchain such as Louis Dreyfus Co. with a cargo of soybeans.
“Simply put, blockchain may not be the right answer for all players,” the report concluded.


Saudi Real Estate Refinance Co. plans up to $1.07bn sukuk sale this year

Updated 23 April 2019
0

Saudi Real Estate Refinance Co. plans up to $1.07bn sukuk sale this year

  • The plan by SRC, a subsidiary of Saudi Arabia’s sovereign Public Investment Fund, comes as it prepares to purchase more home loan portfolios
  • SRC, formed in 2017, is also keen to tap foreign institutional investors for its debt sale this year

RIYADH: Saudi Real Estate Refinance Co. (SRC), modelled on US mortgage finance firm Fannie Mae, aims to issue up to 4 billion riyals ($1.07 billion) of long-term sukuk this year, its chief executive said on Tuesday.

The plan by SRC, a subsidiary of Saudi Arabia’s sovereign Public Investment Fund, comes as it prepares to purchase more home loan portfolios from mortgage financing companies and banks to boost the Kingdom’s secondary mortgage market.

SRC, formed in 2017, is also keen to tap foreign institutional investors for its debt sale this year, Fabrice Susini told Reuters in an interview.

“Our strategy is clearly to tap the market twice this year,” he said. “We are really looking at probably issuing something between ... 2 and 4 billion riyal that we may be issuing in two tranches.

He said SRC was looking at sukuk in the 10 to 15-year range, to help minimize refinancing risks. “Generally speaking we are trying to issue as long as possible,” Susini said.

He said the company was assessing whether it could also issue bonds in currencies other than the local riyal.

In March, SRC completed a 750 million riyal sukuk issue with multiple tenors, under a program that allows it to issue up to 11 billion riyals of local currency denominated Islamic bonds.

“The rule of the game for us is, like many projects across the Kingdom, attract liquidity from foreign investors,” Susini said.

He said SRC had spent 1.2 billion riyals from its balance sheet buying mortgages from local mortgage financing companies and provided liquidity to these firms.

It has also signed initial accords with several commercial banks to acquire housing mortgage portfolios.

Saudi Arabia’s housing ministry is targeting the mortgage market to reach a total value of 502 billion riyals by 2020 from around 300 billion riyals now.

The government wants to increase activity in the real estate market as it moves to revitalize the economy and is taking steps to reform the sector as part of its 2030 reform plan.

It has been working with developers and local banks to counter a shortage of affordable housing — one of the country’s biggest social and economic problems. Saudi Arabia wants 60 percent of its nationals to own homes by 2020, up from 47 percent in 2016.

The size of real estate financing relative to its gross domestic product is 5 percent in Saudi Arabia compared to 69 percent in the United States, 74 percent in the United Kingdom and 43 pct in Canada, the housing ministry has said.

“The goal of SRC in this market was to make sure that we will be able to refinance at least around 10 percent of the market in 2020, and 20 percent of the market by 2028,” Susini told Reuters.