How a London AI start-up is protecting UK plc from commodities market chaos

Two of the biggest business stories of our time are the chaos in commodities markets and the narrative that AI is disruptive and destroying jobs.  So the successful launch of ChAI Protect, a  London start-up using AI to provide protection to manufacturers from raw materials price shocks by creating an entirely new insurance market is, to put it mildly, refreshing.

Tariffs, geopolitics and climate change mean price shocks for the essential raw materials our economy consumes have ceased to be shocking and are essentially the new normal.  With margins so thin for far too many UK companies the impact can be profound and sudden shifts in raw materials and ingredients prices can even be existential.

Enter ChAI, a firm that has demonstrated its AI powered commodities price forecast technology is so accurate that price risk in the space has become insurable for the first time ever.  The associated product, ChAI Protect, is backed by tier 1 underwriters and already has multinational clients. That means that companies no longer have to accept that extraordinary price volatility in the essential raw materials and ingredients they use is like the weather – they can now insure themselves, buying protection from those risks with an easily bought and arranged premium.

ChAI started out as a commodity price forecasting specialist that took the AI used by hedge funds to speculate out of Mayfair and put it in the hands of procurement teams at manufacturing companies who have to actually buy raw materials from the same markets.  ChAI’s tech works by interrogating thousands of data points ranging from satellite imagery of harvests and shipping movements to market positions, weather models and consumer-demand trends to create highly accurate, state-of-the-art price movement forecasts.

The catch was that for all but the biggest, most sophisticated companies even if you have that information there was nothing you could do about it.  The only price mitigation strategies in existence use traditional hedging which requires (for starters) an investment bank derivatives trading team, mark to market accounting and a liquid futures market in the spaces you want to mitigate your risk.  For these reasons, in practice, only giant firms like multinationals could use these approaches.

“Our clients were essentially telling us that we were giving them a brilliant and precise understanding of the trouble they were in and no way of doing anything about it.” said  Tristan Fletcher, CEO and Founder of ChAI Protect.  “That really bugged us.”

Tristan’s team’s breakthrough was to fix that by packaging price mitigation strategies as insurance products,  creating entirely new insurance markets in commodities price risk.  They did this by demonstrating to major insurers that their tech was so accurate at identifying the price ranges of any given commodity over time that the associated risk can be backed and underwritten as an insurance product.

Price risk mitigation through insurance is a game changer. For a start it creates accessibility, making price mitigation available to firms of all sizes.  Whereas traditional price mitigation strategies used to be only available to multinationals –  a high street bakery can now insure their exposure to sudden dramatic shifts in the pricing of essentials like wheat, cocoa and butter in the same way that they insure their van and premises – with a premium.

Furthermore, traditional hedging’s viability is limited.  It needs an active futures market in a given commodity.  If there is no futures market there is no hedging.  Futures markets simply don’t cover some materials and some of these are a huge and essential part of the manufacturing economy.  Perhaps the biggest example is packaging materials like plastics and cardboard and, in particular, recycled plastics where there has been no way of mitigating price risk, anywhere, until now. ChAI’s tech enables it to operate in these spaces.

Fletcher added: “Unlike old school hedging – we can step into markets that are very idiosyncratic or very new – like recycled plastics.   Which is great because, ultimately, companies are fairly agnostic about what raw materials they use.  They’ve been wanting to do the right thing but it’s been financially impossible to hedge recyclable options.  Now we’ve given them a market mechanism to do so and we’re delighted that we have a huge amount of interest from household names in recycled plastics.”

But  Fletcher feels it is the potential to create resilience at all levels of the economy that is the most positive change ChAI’s AI could create: “Smaller companies have such thin margins that they are very exposed to the wild swings in the pricing of their raw materials.  When you look at our world today, that is not going to get better anytime soon.  The new insurance markets we have created provide simple solutions and give companies of all sizes  more options than they had before.  AI is often portrayed as a destructive force – it’s exciting to have created a way it can protect jobs and growth.”