Prepare for wild commodity price swings

2 December 2011

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2 December 2011 | Angeline Albert

To survive wild swings in commodity prices companies should have a workable risk management strategy - but many do not, research has found.

Corporate leaders are being urged to develop analytical tools, staff skills and formulate a governance programme to limit their organisation’s exposure to commodity prices in the Volatility not vunerability, published by management consulting firm Oliver Wyman.

The report, published in collaboration with Association for Financial Professionals, said: “While companies in agri-processing, oil refining, and wholesale electricity generation have developed formal approaches to trading and risk management programmes, the majority of companies need to do more, much more.”

It also said commodity risk management “can no longer be considered the sole responsibility of procurement or finance staff”. 

With rising commodity prices affecting companies’ short-term earnings and long-term investment plans, the report said it was ‘imperative’ that executives develop a deeper understanding of how to mitigate these risks.

The report said procurement staff often enter into forward, fixed-price arrangements to guarantee both supply and pricing, effectively placing a bet on future prices, which informs price risk management plans. “Companies need to accept that the days of a ‘set it and forget it’ approach to risk management, are over.” It said companies should empower staff to think like traders and ask ‘Is this a good or bad price and should I buy more or run down inventory?’

Volatility in commodity prices in recent years has been partly attributed to erratic weather events and growth in emerging markets which has increased global demand for food, energy and raw materials. At the start of the year, the 2011 World Economic Forum Global Risks survey revealed corporate leaders were in agreement that a major risk they face in the coming decade is extreme volatility in energy and other commodity prices. 

Wyman’s report said: “This volatility could persist for years, particularly given that governments appear willing to disrupt or intervene in markets, including halting exports. These collective forces have created pressure for corporations to develop strategies to mitigate this growing risk.”

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