Climate change presents ‘once-in-a-century’ opportunity for commodities traders: TELF
In a highly energy-intensive and carbon-generative industry like ferro-chrome, producers naturally have a growing focus on their energy usage and emission levels and what they can do to mitigate them, especially while end users increasingly look to solidify their own green credentials
And elsewhere in the supply chain, even for companies not directly involved in the processing or extraction of the raw materials themselves, the focus on decarbonization and mitigating environmental impact is just as critical.
For a company like physical commodities trader TELF, climate change presents a “once-in-a-century opportunity” to become part of a “megatrend” like energy transition, chief executive Nikolay Litvinenko told Fastmarkets in an interview.
“As a trading company, the key decision we are making is the portfolio of commodities we trade and the partners along the supply chain we are working with. And we are addressing it by changing the portfolio of commodities we trade,” he said.
“For example, for a significant part of our history, the company traded energy products – oil and coal. However, as fossil fuels have become increasingly unpopular, we gradually diversified away into metals trading, which today represents more than 80% of our business.”
This includes an increasing share of metals like cobalt, copper and nickel, which are vital to the energy transition. This means the company benefits from these trends and plays some part in energy transition and potentially reduces negative climate impact, according to Litvinenko.
The energy transition globally also has the potential to create more demand for ferro-alloys, he said, while countries look to develop the infrastructure further for offshore and onshore wind power. Beyond this, ferro-chrome’s heat-resistant and anticorrosive properties mean it plays a key role in the automotive and aerospace sectors, among others.
“Ferro-alloys, and our main high carbon ferro-chrome product in particular, are essential components in stainless steel, the production of which accounts for around 80% of ferro-chrome consumed worldwide,” Litvinenko said.
As such, ferro-alloys can play a role in the development of lower carbon gas and nuclear power generation infrastructure, as well as offshore and onshore wind power infrastructure
“As such, ferro-alloys can play a role in the development of lower carbon gas and nuclear power generation infrastructure, as well as offshore and onshore wind power infrastructure.”
The major challenge for the ferro-chrome industry, however, remains its ongoing reliance on coal power and other fossil-fuel based resources for production, along with its energy intensive nature.
“All major producers – South Africa, China, and Kazakhstan – rely on access to cheap coal-fired power to produce their products,” Litvinenko said.
“So decarbonization of the power supply is the key near-term target for ferro-chrome producers to reduce the sector’s carbon footprint. While there is a growing number of initiatives to bring more renewable energy into the mix, the industry will require significant investment to reduce its reliance on coal power gradually.”
For TELF, whose involvement in the ferro-chrome industry comes through its partnership with Kazchrome and whose activities include trading, off-take agreements, agency agreements and logistics, there is a role to be played as a facilitator in the green transition, Litvinenko added.
“We see our role as a supply chain facilitator in several respects,” he said. “First, we work with end consumers and pass through their feedback to the producers with regard to regulatory and user demands related to the quality of the commodities and their carbon footprint.”
Going in the opposite direction, Litvinenko said, the company channels information back to consumers about carbon footprint from commodities production, as a way to help them calculate their exposure.
In terms of the commodities in which TELF trades, he said, most of the metals are “highly recyclable,” and the company is “actively monitoring the secondary materials market” with a view to potentially entering the recycling business for its commodities at some point in the future.
For now, through its own activities, TELF acts as a cog in the machinery of the energy transition, by facilitating the trade of relevant commodities, such as cobalt, copper and nickel.
“In the long run, this shall reduce the global carbon footprint by reducing the role of the fossil fuels,” Litvinenko said.
“We [also] help producers of the commodities to access global markets and generate revenues that could be invested in new technologies reducing carbon footprint, for example, electric machinery, or solar or wind-powered mining operations.”
And the suppliers from whom TELF sources its material are also using various measures to help minimize the negative environmental impact of their activities.
“Such measures are increasingly important in the context of broadening stakeholder scrutiny of ESG (environmental, social, and governance) impacts taking place at all stages of the value chain. This includes a growing focus on the cross-lifecycle impacts of commodities themselves,” Litvinenko told Fastmarkets.
Kazchrome and Kazakhstan
“We monitor very closely our sources’ progress on environmental impact mitigation progress. For example, our key sourcing partner for ferro-alloys, Kazchrome, applies a range of international management system standards,” he added.
Kazakhstan-based Kazchrome, which is part of ERG and, according to its website, is the largest producer of high carbon ferro-chrome in the world, uses various international standards, such as ISO 14001 certification, which sets out the requirements for an environmental management system.
“[It also] implements a range of strategic initiatives to minimize its negative impacts and risks, such as upgrading air filters, application of enhanced air quality monitoring technology, ongoing waste reprocessing and recycling initiatives, and wastewater treatment, among others,” Litvinenko said.
As a country, Kazakhstan is a leading producer of ferro-chrome, with longstanding production and strong supply chains, which are “well-established, very efficient and well-managed,” according to Litvinenko.
The difficulty, however, is that Kazakhstan is a land-locked country, and it is therefore heavily dependent on neighboring countries to access seaports to move goods into export markets.
“So in the current turbulent geopolitical environment, it is not always easy, but we manage to ensure a stable flow of goods even in the most difficult times,” Litvinenko said.
But from a legal perspective, he added, the company does not view Kazakhstan as a difficult jurisdiction to operate, especially compared with some countries in Africa and Latin America.
“We believe that the overall investment climate in the region is improving and becoming even more favorable for foreign investors. And as a commodity-rich country, Kazakhstan has a lot of potential,” Litvinenko said.
In terms of logistics and the selection of companies with whom it partners, the company applies a “robust compliance framework,” Litvinenko said, covering sanctions compliance, anti-bribery and corruption, counterparty due diligence, among other applicable legal and regulatory requirements.
“The framework has been tailored to focus on business activities that present higher levels of inherent compliance risk. We are constantly enhancing our due diligence processes, expanding the scope and including additional ESG risks,” he said.
There are challenges, however. Although TELF uses a “rigorous process” to select its partners, including thorough background checks and visits to providers’ facilities, because of the relative size of its operations and the specifics of supply chains, the company cannot currently afford to select service providers on the basis of ESG criteria, Litvinenko said.
He added that this is likely to be an issue for various commodities traders because commodities are often produced in areas of the world with limited basic infrastructure and a limited selection of local providers.
“For example, the DRC [Democratic Republic of Congo] produces around two thirds of global cobalt and a significant amount of copper. Most of these goods are being trucked out of the DRC to the export ports, which, as you can imagine, is not necessarily the most efficient way of transportation from an environmental perspective,” Litvinenko said.
“From an environmental and economic perspective, we would prefer using a railway, but it simply does not exist. And using electric trucks is probably a decade away, and, at the moment, it is also not a feasible option given the power supply issues in many countries along the way.”
In terms of sea freight, he added, the company has to compete for scarce container slots on large vessels in order to deliver commodities to its clients within required timeframes.
“We do note, though, and we welcome, that the shipping lines are increasingly focused on using less polluting fuels that shall improve the carbon footprint for the supply chain over time,” Litvinenko said.
For itself, as a trader operating with a small workforce and physical footprint, Scope 1 and 2 emissions are limited, which means, because the company arranges delivery of the commodities it trades, Scope 3 accounts for almost 100%, Litvinenko explained.
“This reflects our extensive use of heavy transportation services, including shipping, railway and road transportation – as well as the significant environmental impacts associated with the commodities we trade,” he said.
“The managing process starts with an understanding of where you are. And this is not a simple question by itself, as there are no clear industry standards for measuring Scope 3 emissions yet.”
The company is now working with solution providers and advisers like CarbonChain, which creates technology aimed at enabling “data-driven climate action” in supply chains, to measure its Scope 3 emissions along its own supply chains.
The aim is to be able to assess better its own position and what can realistically be done, Litvinenko said.
“But for a pure play trader, which neither produces nor consumes commodities, it is not easy to impact either the upstream or downstream customer base,” he added.
Jurisdictional challengesBecause the company operates across a large number of different jurisdictions, there are also challenges in terms of legislative and regulatory requirements.
One of the main issues, Litvinenko said, is a lack of standardization and harmonization of the various requirements globally, making the compliance process less efficient.
“For a company of our size, it is not always easy. For example, we constantly monitor and manage geopolitical developments and sanctions risks, to ensure an uninterrupted commodity flow to our customers – as well as our own, ongoing legal compliance,” Litvinenko said.
“The nature of our business, as well as the geographical breadth of our activity, means we must ensure, on an ongoing basis, that we are in full compliance with all relevant sanctions and export controls. Our Global Sanctions and Export Controls Policy Sanctions Policy establishes a comprehensive and coordinated approach towards sanctions and export controls compliance.”
Currently, most of the requirements the company must meet are to do with reporting, and he added that TELF adjusts its reporting standards to new regulations.
“We hope that there will be a harmonization of rules and regulations in the future, making the compliance process more efficient,” Litvinenko said.