Commodity risk management: Act fast and with confidence
For investors, engaging with the markets can be easy. If a certain market you have interest in becomes unstable, simply cash out and look elsewhere to invest.
However, if your business is dependent on volatile markets for success, engaging with them is an entirely different story. In businesses that are highly exposed to volatile asset classes, it is important for corporate treasurers to know the value of good risk management.
Nowhere is this more relevant than in the commodities space. It has been a turbulent few years for commodities in general, and although certain sectors, like energy, are not hitting the headlines as much as they were a few years ago, the markets are still very challenging.
Year-to-date oil prices are down nearly 20%, and natural gas prices have taken a turn for the worse in 2017. Metals have been more resilient along with certain agricultural commodities, such as wheat and corn, but these are off historically low prices. Volatility – the bane for any treasurer – is also high in certain markets.
Market experts claim it will be years before oil returns to $100 a barrel (the benchmark before the surprise collapse in 2014). However, those same experts are suggesting crude could rise to $60 a barrel or even higher later this year; noting that after a price dip in March, that conviction has waned.
Not even expert commentators can be sure – global markets are simply unpredictable. As a corporate treasurer, the best chance at managing risk involves gaining and utilising access to as many credible data and analytics sources as possible in order to build a view of the risk in the market.
Armed with this information, a treasurer can act in a prudent and appropriate way to mitigate downside risks to the business. This extends beyond commodities to all manner of financial markets risks – interest rates, foreign exchange and counterparty risk to name a few.
At the nexus of all types of financial market risks are commodity houses. With the trading of hard and soft assets, these companies take on a host of risks that need to be hedged.
Mercuria is one such commodity house. This privately-held Swiss international commodity trading company is headquartered in Geneva, with operations across the globe including a treasury centre in Singapore.
Given its global exposures, Mercuria actively manages its commodities, FX, and fixed income assets, as well as credit terms with trading counterparties. Working in partnership with Thomson Reuters, Mercuria utilises its own solutions platform to manage these cross-asset requirements – including credit screening and pre-trade to post-trade.
With technology that allows access to global markets data, insights, and analytics, Mercuria is able to price up derivative products, understand and act on mark-to-market exposures and ensure hedging strategies are on point.
Thomson Reuters’ solutions marry well with companies exposed to the financial markets; they provide users with global news updates, economic updates, bank research, and even a real-time alert service tailored to the needs of the treasury department, via smartphone or tablet if needed.
Mercuria's Asia treasury manages an FX portfolio for operations and commodities trading requirements. It oversees Asian and G10 currencies and will purchase forwards, swaps, and non-deliverable swaps to hedge the company's exposures. It relies on Thomson Reuters to price-up all required FX products with curve data sourced from both the vendor itself as well as analytics from post-trade mark-to-market valuations.
For the longer-term debt on its books, Mercuria will buy interest rate swaps and cross-currency swaps, for which Thomson Reuters is able to deliver pricing for currency basis swaps sources – from itself, and from interdealer brokers and overnight index swap markets.
For credit-terms with counterparties and banks, Mercuria taps Thomson Reuters’ credit-score matrix as part of its counterparty credit risk management strategy.
As you can see, finding ways to access as much data as possible allows you to act with a level of confidence that is hard to achieve if you don’t have a centralised method to source information and transact.
Ones to watch
Partly because of the nature of their business and the economic turbulence many in the industry are facing, commodity houses are at the forefront of treasury innovation.
Mercuria was one of the first companies in Asia to create a rare “against the sun” liquidity solution to move cash between Mercuria’s treasury centres in the US and Europe. It integrated a domestic multi-currency notional pool with an automated end-of-day self-funding account structure whereby the group accounts share the same aggregate available balance throughout the day.
As CT reported in May, for example, Bunge – a US-listed agribusiness and food company – executed its first electronic transaction under a letter of credit, shaving days off the time needed to facilitate a bulk cargo shipment of Brazillian soybeans from Brazil.
The move is part of the US agribusiness operator’s global digital trade plan, which it has been implementing since 2015. Last year, Bunge also completed the first ever end-to-end electronic agri-transaction into China.
There is no way to completely eradicate your exposures to the markets. However, there are many ways to mitigate against loss, improve operations and stay in touch with the markets. Having good access to data along the chain, from pre-trade to post-trade, can allow you to act with confidence and push you and your treasury team to innovate and lead positive change.
Cross-asset data feeds
If you are feeling really adventurous, a treasurer should consider whether your treasury management systems (TMS) have the capacity to relay both more traditional foreign exchange and interest rates data and also commodity-related information. Certain vendors are able to provide cross-asset content feeds through a TMS that can allow treasurers greater visibility of their overall financial and physical exposures.
More data contained in one place is an important value-add.
For more information, please contact:
Market development manager, corporates and supply chain – Asia