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Commodity Risk Management: Time for Action?

by Olivier Cattoor and Olivier Kaczmarek, PricewaterhouseCoopers, Belgium

Introduction

A treasurer’s job description includes protecting the company from adverse financial risk movements. While this is a commonly agreed paradigm with respect to foreign exchange, interest rate, liquidity and credit risks, the above statement is not necessarily true for commodity risk.

We will first examine why some companies exposed to commodity risks have not yet started to actively manage those exposures. We will then focus on a few examples of companies which successfully manage commodity risks. Finally we will seek to highlight from these examples, tips and hints that can be applied to better manage commodity risks.

Reasons for inaction

With the exception of a limited number of companies with significant commodity exposures at the core of their activities (e.g. airlines, metal refining companies, etc), it is surprising to note how few treasurers and CFOs have a clear view of the commodity exposures of the company. This situation is worrying in a context of increased deregulation and volatility of energy and commodity markets.

Here are some of the potential root causes for this situation: