This article examines why large commodity losses rarely begin with a single failure, but instead accumulate when assumptions about physical reality drift, signals remain siloed, and binding decisions are made before truth is enforced.
Physical commodity risk does not fail when a loss occurs. The loss is the outcome — not the failure.
In many of the largest commodity-related losses, the failure happened earlier, when binding decisions were made based on assumptions about physical reality that were no longer fully aligned, no longer current, or no longer enforceable.
By the time inventory discrepancies, disputes, or defaults emerged, exposure had already been locked in. The risk had already been taken.
What Do We Mean by “Risk Is Taken”?
In physical commodity markets, risk is taken when a decision becomes binding and exposure becomes difficult or impossible to reverse.
This includes moments such as:
Losses may surface later.
Problems may be discovered later.
But once these commitments are made, organisations are already exposed to the consequences of whatever assumptions were relied upon at that point.
Risk management that begins after this moment is already too late.
A Pattern Observed in Major Losses
Across multiple well-documented commodity losses, a recurring pattern appears:
The failure was not a lack of documentation. It was reliance on documentation that had drifted from reality.
The Detachment Between Documents and Reality
Documents are logically connected to physical assets, but they are not physically bound to them.
They:
As a result, decisions are often made on representations of reality that no longer reflect what physically exists.
This detachment does not require bad intent. It emerges naturally in systems that were never designed to continuously re-anchor documents to the physical world.
Generic Frameworks Applied to Specific Conditions
To achieve consistency and comparability, many frameworks are intentionally generic.
They are applied across:
This standardisation enables scale, but it reduces sensitivity to local physical conditions. Public analyses of major losses repeatedly show that risk drivers were highly specific to particular locations, inventories, or configurations — even though the framework applied was uniform.
Where physical conditions vary materially, generic frameworks struggle to reflect the true shape of exposure.
Static Frameworks and Delayed Detection
Another recurring feature in large losses is delayed detection.
Most frameworks operate through periodic reviews, scheduled inspections, and fixed reporting cycles. Physical storage environments do not behave this way.
In multiple cases, issues only became visible after inspections were escalated, reconciliations were forced, or market stress triggered closer scrutiny.
This suggests exposure accumulated between cycles, rather than being continuously constrained.
Static frameworks applied to dynamic physical systems do not manage risk — they delay its discovery.
The Limits of Manual Review at Scale
As portfolios grow in size and complexity, frameworks increasingly rely on manual review.
Risk teams:
However, post-event reviews of major losses consistently show that:
This is not a question of capability. It is a question of scalability.
No team can continuously reassess thousands of documents against a physical reality that changes every day.
Budget Constraints and the Reality of Inspection
In practice, continuous physical verification is constrained by cost.
Most organisations cannot maintain constant or frequent on-site presence across large, geographically distributed storage networks. As a result, inspection regimes are necessarily risk-based, selective, and manually prioritised.
This approach is rational under budget constraints. However, it also means that physical conditions are sampled periodically rather than continuously.
When combined with static frameworks and manual interpretation, this creates unavoidable gaps between inspection cycles — periods in which material changes can occur without immediate visibility or shared awareness.
A Market That Operates in Silos
A further compounding factor is that the physical commodities ecosystem operates in structural silos.
Banks, traders, insurers, operators, inspectors, and auditors each see partial signals, but no single party has a complete or continuously updated view of reality.
As a result:
In many major losses, different parties identified issues at different times — but those signals were not connected early enough to prevent exposure from building.
This fragmentation is not a coordination failure. It is a consequence of systems that were never designed to establish and maintain shared, reality-anchored truth.
Observation Still Differs From Verification
In many cases, inspections and reviews confirmed what was observed — but did not ensure it remained true.
Observation captures a moment.
Verification requires constraints that:
Where these constraints are absent, even well-reviewed evidence can outlive the conditions it was meant to describe.
Why Post-Commitment Risk Assessment Is Insufficient
Once financing is committed, trades are executed, or coverage attaches, the role of risk management fundamentally changes.
At that point:
Frameworks can explain outcomes — but they cannot undo the reliance that created them.
Across major losses, the critical failure point is consistently upstream: commitments were made before physical reality was sufficiently constrained and shared.
A Different Direction
What emerges from these patterns is not a need for more documentation or more review.
It is a need to change when and how physical reality is enforced.
Frameworks aligned with prevention would:
Risk would be governed before decisions become binding, not investigated after exposure has already formed.
From Retrospective Explanation to Preventive Control
The lesson from large losses is consistent:
Risk management that begins after commitment is already too late.
When physical reality is treated as the starting point — and truth is shared rather than fragmented — misalignment is surfaced earlier, exposure is constrained sooner, and losses are less likely to accumulate silently.
This is the problem Sphere was built to address.
Disclaimer
This article is intended for general informational and educational purposes only. It discusses observed industry patterns and structural risk considerations and does not constitute legal, financial, or investment advice. References to losses or failures are illustrative and non-exhaustive, and do not refer to any specific organisation unless expressly stated.
