What Are Companies Doing to Stay on Top of Commodity Risk? (Part 1)

With a hat-tip to the relatively new and excellent blog by Triple Point on Commodity Management, I came across a research study by PWC that reports on how treasury is playing an active role in staying on-top of commodity risk. The article cites three different strategies/observations from a survey of treasury groups: managing volatility, more active heading, and "synergies unrealized." Perhaps most interesting, finance appears to be stepping in and taking over commodity risk management from procurement. This is similar to a trend we have observed over the years when it comes to the more general management of supply risk (e.g., supplier financial viability).

Specifically, PWC observes, "as energy and raw material price volatility increases, responsibility for commodity risk management (CRM) is moving from sales and purchasing departments to either treasury or specialist CRM unit." With this transition in management has also come an increasing focus on "active hedging." PWC suggests that 33% of respondents in their recent survey "take an active or aggressive approach to commodity risk management, compared to 25% before the crisis." Further, "this reflects growing recognition of the potential for illiquidity in these markets and/or the structural supply and demand imbalances, which can make a mechanical hedging approach unworkable."

For many companies, technology appears to be coming up short. Specifically today, most participants in the study "still rely on spreadsheets for commodity risk (57%), with only 16% using their transportation management system (TMS) and 3% a best-of-breed application." Perhaps this suggests a huge opportunity for companies like Triple Point to sell core commodity management platforms into both procurement and treasury that provide a range of capability from contract management (financial contracts such as options/futures, not the same "contract management" we typically think of from buy-side, sell-side and legal vantage points), trade capture, logistics/scheduling and position forecasting, coverage, risk management and decision support capabilities -- not to mention a range of other areas.

Stay tuned for our further analysis of what top organizations are doing to stay on top of commodity management. In a series of seven posts, we'll share some of the best practices we're seeing in the market from both Spend Matters' and MetalMiner's vantage points.

Jason Busch

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