PRAVEEN Kumar Jain, managing director of Valency International Trading, sees volatility as "good for business" for the commodity trading house that he founded. This is because the company can profit if its traders price its commodities correctly, he tellsThe Business Times in an interview.
The company, which trades beans, cocoa beans, ground nuts, packaged foods, raw cashew and cashew kernels, rice, sesame seeds and sugar under its agro and consumer food products segment - its mainstay business - was set up by Mr Jain in 2007 in "the best boom period for commodities", according to him.
Today, Valency has grown to boast a presence in 38 markets across Asia, Africa, Europe as well as North and South America, with 13 offices globally. Mr Jain, who had spent more than a decade at commodity trader Swiss Singapore Overseas Enterprises prior to his entrepreneurial venture, heading its international trading division at one point, concedes the pace of volatility in commodity trading has indeed heightened.
"What I realise is that volatility which we used to see in a six-year time period now comes in six months. The pace of volatility is increasing year by year; this looks to be a trait that has already set in and it's going to keep growing." He cites the increased trading of commodities on stock exchanges as one factor that has contributed to the greater volatility, saying: "Many financial players also enter into buying and selling, but they are not real commodity traders. Artificial demand and supply is being created by them."
Another factor is that information technology and artificial intelligence have made the transmission of data very rapid.
"One single thing happens in any part of the world, and the whole market starts reacting very quickly. In the past, this information travels, and people interpret it and take time to decide, but now there is just a fraction of a second if something happens in Hong Kong or the United States or United Kingdom that affects its currency. Commodity prices are quickly affected."
This is precisely why he has been trying to create a strong presence in the company's origination markets, meaning from where the crops were originally sourced. This is because when the company has a team on the ground, it is able to extract information - related to weather, crops or competitors - far more quickly than its peers, thus giving it an advantage in trading. "We know what is going to happen on the production side, because we are near the farmers. If we know that the crop is likely to be short, we will take an overall assessment of demand and supply and position ourselves accordingly. "I take volatility to my favour because volatility is good for our business. Violent volatility is not good, but prediction of volatility can bring profit for us."
The company's agro and consumer food products segment contributes more than half of its revenue, with two other main segments - fertilisers, chemicals and sulphur and industrial - making up much of the rest.
In terms of creating whole value chains, Valency is currently pursuing backward integration for its cashew business by building processing facilities at its origins in West Africa, where it is already one of the largest traders of raw cashew nuts.
Valency started with cashew because the company already had a strong presence in the cashew international trade, especially in West Africa, a major origin of raw cashew nuts. This led to the firm's decision to get into processing, rather than sending the commodity to markets such as Vietnam or India for processing and re-exporting.
Valency is building "a very large, state-of-the-art processing facility" for cashew processing in the Ivory Coast which will essentially double its production capacity once completed in 2020. It is also expanding its cashew processing facilities in Nigeria, as well as its other cashew processing facilities in Vietnam and India.
At the same time, the company is exploring similar value chain integration for its other commodities such as sesame seeds, cocoa beans, grains and fertilisers.
The benefit of building a complete value chain is that, firstly, the company becomes able to expand its overall knowledge and intelligence on the business, so as to make consolidated decisions as a whole.
Secondly, one part of the supply chain also allows the firm to hedge its risks in another part of the supply chain; and thirdly, the company becomes more confident in its business, compared to if it were dependent on a third party for processing, which would carry counterparty risks.
He adds that commodity trading is a highly expertised game which requires not just knowing the commodity and the risks related to them, but also having the right relationships with customers, suppliers, as well as knowledge of the legal system, business environment and negotiation styles in the countries in which the company operates.
Valency considers the real base of the company to be in Asia and Africa - two regions which contribute more than half of its revenue and rank among its fastest-growing markets. Although it has 1,300 staff on its payroll globally, only 22 are located at its head office in Singapore.
In its fiscal year ended 2019, the company generated revenue of US$470 million, a 9 per cent increase from US$430 million a year ago. Mr Jain declines to discuss profit figures.
Besides the expansion of its cashew processing facilities, Valency is also building a steel production plant in Ethiopia. It has recently entered into the distribution business of fertilisers in Myanmar, and plans to introduce a few product lines such as agrochemicals in West Africa.
Mr Jain says 2019 has been a good year for the company, thanks to improved oil prices, stable currencies, and "better-behaving" commodity markets. "In Singapore, I see a better environment on the liquidity front than what it used to be in the last two years. Trading confidence is coming back in the market, which helped our business to grow and enabled us to introduce various initiatives to increase our business," he says.
Next year, he expects revenue growth of 15 per cent. For any trading company, the greatest risk is always any major politically motivated upheaval in any part of the world which can impact currencies and create trade embargoes.
But he does not foresee much threat ahead for Valency. The company has fortunately been fairly unaffected by the US-China trade war as it does not deal much in the affected commodities except soya beans and, even so, its trade flows are very different and still mostly centred in Africa and Asia.