Blockchain technology can help the global iron ore industry thrive amid the headwinds encountered by steelmaking countries around the world, according to Singapore’s DBS Bank.
“Much of the iron ore industry remains mired in antiquity with many processes still done manually, which gives rise to the risks of human error and a lack of data transparency across the supply chain,” its group head of trade product management, Sriram Muthukrishnan, told Fastmarkets.
This includes trade documents such as letters of credit (LCs) or shipping papers.
The problem is exacerbated by the iron ore supply chain comprising large networks of stakeholders including shipping, customs, freight forwarders and couriers across multiple geographies, Muthukrishnan said.
Two of the world’s largest iron ore miners have already started concluding trades using blockchain technology, clearing at least $34 million worth of iron ore since late 2019.
In May 2020, BHP completed its first blockchain-based iron ore transaction with Chinese steel giant Baoshan Iron & Steel.
A month later, Rio Tinto used blockchain to clear a yuan-denominated iron ore deal that was facilitated by DBS Bank.
In November 2019, DBS Bank and Trafigura completed their first pilot trade on an open-sourced blockchain trading platform for $20 million worth of African iron ore shipped to China.
How does it work?
Both applicant - or the steel mill - and beneficiary - the iron ore miner - are able to negotiate the terms of the LC directly on a blockchain-based platform, such as the Contour Network facilitated by DBS Bank.
This, in place of scattered discussions over email, letters or over the telephone, is more efficient and reduces human error.
Once negotiations are concluded and terms are agreed upon, they are digitally endorsed by both parties and the issuing bank will issue a digital LC that can be sent by the advising bank to the beneficiary in real time.
The beneficiary can also do an electronic presentation of the documents called for under the LC via the nominated bank instead of collating physical documents to be presented at the bank’s branch.
This reduces the settlement turnaround time and removes the need for physical couriers that could lengthen the settlement process.
Blockchain improves the transparency of business practices by facilitating regulatory compliance and speeding up the traceability of transaction history.
“This can help foster trust in the ecosystem that often has counterparties across various continents, while mitigating fraud risk at the same time,” Muthukrishnan said.
The ease with which information can be verified on goods, transactions and supply chain participants across the entire trade ecosystem is also another benefit.
“Its immutable properties ensure that there is no corruption of data and it enhances the trust between counterparties and the banks that are providing the trade finance,” he said.
The trade transactions are also recorded in sequence and allows for a complete audit trail across the ecosystem.
“This also nudges corporates to source and trade responsibly to fulfill their or their customers’ sustainability ambitions,” he said.
The emergence of many disparate “digital islands” as a result of different market participants partnering to form digital trade alliances counts among factors that keep blockchain from taking off in a big way.
“Working toward common standards and interoperable platforms that can process both digital and manual trade documentation is therefore critical [because] it would provide time for participants of all digital maturities to participate from the onset while gradually transition toward fully digital processes when they are ready,” Muthukrishnan said.
A high adoption rate among industry participants is also needed to unlock a “network effect”.
“Smaller [participants] may need a greater push [because] they tend to lack the financial ability or sophistication to implement new solutions. In this aspect, support from banks and large anchors in the form of pricing incentives and education on the benefits of digital solutions are often useful in encouraging a shift in mindsets,” he said.