![]() The fact of the matter is that commodity volatility is here to stay and companies that don’t take steps to mitigate its effects are in severe danger of being left behind. Many manufacturing and consumer products companies make the mistake of assuming that price spikes are a temporary thing, and think that they don’t need a strategic, long-term strategy for managing volatility. According to Gartner’s Predicts 2012 report, without effective risk management processes, commodity volatility easily translates to a double-digit percentage hit to the bottom line. Volatile commodity prices cause fluctuations in the cost of ingredients and subcomponents that, if not properly managed, will adversely affect profit margins and ultimately earnings. Corporate treasurers must make managing commodity price risk a high priority in order to protect profits and remain competitive. Michael Schwartz, SVP, Chief Marketing Officer, Triple Point Technology: The results we have seen from companies taking over the management of commodities indicates that treasury has successfully applied the financial risk management techniques they have always used, including examining natural offsets across the enterprise and the prudent use of derivatives. As the global financial crisis made painfully clear, this was not always the case. In times of low volatility, this strategy worked well however in times of extreme volatility, this strategy pre-supposed that the supplier had the appropriate risk management acumen to run its own business. Prior to the financial crisis, the most common method for procurement departments to use in managing the price risk of commodity purchases was to require suppliers to provide their commodities at fixed prices over a given time horizon. The major trigger for this decoupling seems to have been the global financial crisis, which allowed treasury departments to showcase their financial risk management acumen and cast into the spotlight the inherent risks prevalent in physical fixed price contracts. This decoupling has allowed procurement to concentrate on managing supply chain risk (the risk of procuring commodities and delivering them when they are needed by the organisation), while treasury take ownership of managing the price risk associated with procuring these commodities. We also have seen a decoupling of price risk from supply chain risk. It is natural that treasury, with its mandate to strategically guide the company’s financial health, manages risk across all asset classes. This type of volatility has wreaked havoc on profit margins and many companies’ ability to price their products. ![]() For example, coffee prices fluctuated dramatically between 20, while during the same time metals dropped 68% and then spiked by 172%. Sustained periods of commodity price volatility since 2005 have materially impacted corporate performance. Historically, commodity price risk management resided in procurement, but because treasury already manages exposures from fluctuations in foreign exchange (FX) and interest rates, bringing commodities into the purview of treasury’s holistic approach to risk management makes sense. We’re seeing an increasing number of corporate treasury departments institute programmes to manage the risks associated with volatile commodity prices. Krishnan Iyengar, Vice President of Global Solutions, Reval:
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |