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View Part I

Prelude II

The landscape was growing ever more complex. The further back in time that I ventured, the more other interactions, discrepancies, and “noise” distorted my path. From this need for clarity sprung a miraculous discovery. Each impression that I left in the sand matched the tread pattern on the bottom of my shoe. Not only did my purple and black Tevas complete my image by perfectly balancing function and form, but they also provided me with a unique identifier to track my progress. The path was clear and my pace increased. I followed my footprints past upturned umbrellas, volleyball games, and the ruins of ancient sand fortifications dating as far back as yesterday afternoon. There was that shell that looked cool until you picked it up and it actually was broken, and the dead fish that I chased the seagull off of. There were several areas of interest along my way and thus my footprint ledger forked in several directions; but which chain was correct?

 

Why Blockchain

Blockchain is typically associated with peer to peer electronic cash transfers systems such as bitcoin and ethereum. After its success in this proving ground, we have seen a surge in interest in the financial industry with over 90% of banks exploring blockchain technology for payment tracking.[1] But Blockchain’s capabilities extend far beyond money tracking and interest is growing in other industries. We are seeing a growing diversity in blockchain use cases from tracking land title registries,[2] to digitally verifying the quality of export diamonds.[3] But what about in chemicals? The chemical industry is historically a technologically conservative industry, but tremors of blockchain innovation opportunity are starting to be felt by industry leadership. Chemical companies are outgrowing traditional business models leaving a landscape ripe for innovation.

ZrCoin – Rethinking Commodity Trading

A particularly interesting use case for blockchain has surfaced around commodity trading and may have a significant impact around how chemical companies source rare materials and even generate capital through investments. A group of Russian scientists have developed a process for manufacturing synthetic Zirconium Dioxide, a crystalline substance used as a refractory material in the production of ceramics. Their process uses waste material as a feedstock rather than traditionally mined Zr deposits. This resource is rare and thus it would be highly lucrative to be able to manufacture large quantities of ZrO2 sustainably. Rather than taking the traditional approach to funding the construction of the new ZrO2 plant, the group founded a ZrO2 trading market on a blockchain platform called ZrCoin. In this blockchain market, investors will trade ZrCoins, a derivative representing a physical amount of ZrO2. After the target of 3.5 million dollars in investments are made, a buyback program will commence where the initial investors will be repaid at a premium for the assets that they currently hold, with compensation being either monetary, or in an equivalent of ZrO2. Traditional investors sought to own 70-80% of the business, but by selling futures of ZrO2, the ZrCoin team can retain full ownership of their business.[4] The blockchain platform will offer the speed, transparency, and safety that is inherent in its design, but most importantly, it will enable the creation of a market without the need for a third-party organization to regulate and facilitate trade. This has the potential to dramatically cut down on trading fees since all trades will be B2B. From this, we also may see further opportunities to streamline and automate swaps and exchanges to fil gaps in inventory. The ability to create a commodities market at-will also enables small R&D focused organizations to quickly generate capital for the construction of manufacturing facilities. Agile, adaptable chemical companies with the ability to quickly transition core business models may be a new threat to larger traditional organizations.

Ecommerce in Chemicals – A New Platform for Trade

Digital commerce pioneers like Amazon have revolutionized the way the average consumer makes purchases. These online platforms have completely disrupted several markets with established giants in books, consumer electronics, videos, and more, dissolving a blink of an eye. Amazon held 38% of holiday shopping in 2016 demonstrated its firm hold on consumer level sales.[5] But what happens when ecommerce corporations turn their sights on business commerce? Pressure is already building, and chemical manufacturers are taking note. Some chemical manufacturers are even reporting lost sales to Alibaba, a Chinese ecommerce company who is gaining traction in the B2B space. A major player in petrochemicals has realized the potential upside for automating self-serve ordering for smaller non-contract customers and are looking for innovation around ecommerce. Making use of an existing ecommerce platform would eliminate the need for building and maintain your own website and would significantly cut back on back end order processing. For the moment, the impact is around spot buys, but that doesn’t mean contract based purchasing is not at risk. There is a significant cost associated with contract negotiations and automating this process so that customers can place their own orders would offer significant savings on both ends of the transaction. Blockchain is the obvious choice for facilitating commercial scale ecommerce. A blockchain based system would enable the ecommerce sites to significantly cut down on inventory as transactions are simultaneously processed and verified. This eliminates the need to hold a lot of excess inventory. Ecommerce companies could function more as a facilitator than an intermediate. Another potential issue that has already arisen is the need for anti-counterfeit measures. A chemical company that lost sales on Alibaba noticed that counterfeit versions of their product were listed on the site. Blockchains single ledger verifies the integrity of the product as the record can be traced back to the product manufacturer and even the manufacturer of its precursor agents.

Track and Trace – Innovating Commodity Management

Increased connectivity is allowing businesses to expand out of their region and engage with customers on a global scale. From this, we are seeing greater complexity in our supply chains and in turn, tracking our “stuff” has become an involved process. Contemporary logistics solutions must juggle transportation, location services, regulations, hazards, packing requirements, security, customer engagement and more. Accounting for these variables requires a lot of planning, and complex expensive systems. Even with extensive planning, billions of dollars of goods are lost each year through mismanaged transportation or fraud. Logistics companies are beginning to turn to blockchain for a solution. Maersk has completed its first round of testing on blockchains cargo management capabilities. Maersk partnered with IBM and developed this platform in the Hyperledger consortium.[6] Blockchains single ledger is attractive as there is less room for miscommunication regarding an items location. This also provides a measure of security as the item may be tracked back its source components if necessary. Perhaps the biggest dollar saver would be blockchains “smart contract” ability, where details such as regulations, hazard control, and any other requirements can be programmed directly into the system. This significantly cuts down on order processing and if carried out correctly, should ensure better compliance with shifting government regulation. This is particularly relevant to the transportation of toxic inhalation hazards and pharmaceuticals where there is strict regulation around packing, tracking capability, and even what regions the product can pass through. Blockchain will most certainly play a significant role in track and trace in the coming years.

Spinoff Evolution – A Blockchain Ecosystem

The chemicals industry is currently undergoing some major shifts as demonstrated in the large number of mergers, acquisitions, and spinoffs. Newly formed organizations are finding themselves in a particularly interesting position. They carry with them the brand recognition, R&D expertise, and business relationships from their parent company, yet no longer have the bandwidth to carry the burden of manufacturing, supply chain operations, and other associated processes. This raises the question, why be a “chemical manufacturer” when this is not your core competency. We can expect to see an increased number of companies delivering innovation services or chemicals solutions rather than physical products. These organizations will compete as part of an ecosystem rather than a single business with broad coverage. They will have minimal inventory and will therefore apply products, made by organizations with a core competency around manufacturing, into their overall “solutions.” So how does block chain fit in? Blockchain technology provides an agile commerce platform in which these next generation of chemical companies can compete. The new ecosystems fit nicely into the consortium blockchain model, providing a platform for safe, efficient, traceable resource trading. These trades will also be done without the need for a third party and will be pure B2B transactions. Blockchain also enables users to program the transaction protocol to emulate the logic of a standard contract agreement. The terms and conditions are then enforced and executed by the system itself. These “smart contracts” provide greater security and cut back on costs related to contracting. As service providers, these organizations would greatly benefit from streamlining contract negotiations and minimizing paperwork and legal processing.

SAP is in the process of developing integration between SAP solutions such as Ariba, and blockchain consortiums. This spring, SAP announced it will join the Hyperledger consortium along with technology leaders like IBM and Intel. Despite the hype surrounding blockchain, there are those who still doubt that this technology will be able to take hold at a large scale. Keep an eye out for the third and final installment of this series where we discuss potential pitfalls for blockchain adoption.

[1] Blockchain Technologies. How Banks Are Building a Real-Time Global Payment Network, Accenture, 2016.

[2] Laura Shin. The First Government to Secure Land Titles on The Bitcoin Blockchain Expands Project, Forbes, 2017.

[3] Everledger unveils technology to digitally certify Kimberley Process export diamonds at IBM Edge, Everledger, 2016.

[4] Matthew Warner. ZrCoin Crowdfunds Commodities Option on Blockchain, allcoinsnews, 2017.

[5] Dave Michels. Can Amazon be Stopped?, NetworkWorld, 2017.

[6] David Z. Morris. Maersk Tests Blockchain-Based Freight Tracking, Fortune, 2017.

 

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