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Commodity Hedging in Europe

by François Masquelier, Head of Treasury, Corporate Finance & ERM, RTL Group and Honorary Chairman EACT

Commodity blues

Among other things, the second half of 2008 was marked, from a market point of view, by the steep drop in the price of raw materials after its mid-year peak.

We all knew that the prices were over-evaluated. The global economic growth supported the price of commodities for a long time. Yet this market is characterised by its great adaptability. When the demand drops, the producers adjust their offer little by little (for non-agricultural matters that are subject to possible climatic contingencies).

The relative gap between the spot price and the future price has hit record levels. The spot price which we notice the most, is decidedly that of petrol (almost divided by four as compared to its highest level in 2008!). But for the prices to stabilise, there must be a balance made between offer (production to be reduced and adjusted) and demand (dropping), providing that intrinsic elements influencing the price do not interact (i.e. cold or warm weather, storms, floods, freezing, etc.). In the short term, no one predicts a real rebound of raw material prices. In fact, adjustment of the production is never immediate and the increase in production requires an activation period. The elasticity has a certain technical or seasonal inertia. In the long term (2010), an increase is expected. However, 2008 will not be forgotten. Even at USD30 a barrel, everyone would like to pollute less, consume less, recycle what can be recycled and use more renewable energy. Demand is not always driven by lower prices.

Commodity hedging: tough task but necessary

The extreme volatility of raw material markets has pushed a number of businesses to cover their exposure even more. The turning of the markets disturbed them; some were even over covered. As always, it is in a period of crisis that we feel compelled to review our hedging strategies of raw materials.