All too frequently commodity-based producing and processing companies view the risk desk as a black box, difficult to understand and not to be interfered with. It is this very attitude that undermines risk activity itself. Effective price risk management, just like health and safety, must be visible. Here are key considerations.
Price risk management policy itself can be the source of a company’s price risk problems. It’s often here that the first major errors are made, which end up distorting price risk management program results. Left unresolved resulting problems could run a company off the track.
Sometimes the perspective of history only allows us to understand a trend or a cycle when it is almost over. Such is the case with the recent scandalous case of the aluminum ingot premium bubble and the related LME warehouse queues. Sometimes we can learn a lesson from history, sometimes not. We have been preaching the dangers of these warehouse manipulations for years now and are penning this blog in the hope that this is a case from which we can learn some valuable lessons.
Selecting a price risk advisor shouldn’t be done in haste. Advisors come from varied backgrounds and have different focuses but if price risk for a business emanates widely from deep within its workings, experts are needed. Research your options, think about the nature of your risk exposure and pick wisely.
The volatility of commodity pricing can have a devastating financial effect on processing businesses which should themselves be risk pass-through operators. Buying and selling commodities with timing mismatches on prices causes unwitting commodity speculation and this can generate greater financial losses than processors can recover from their added-value manufacture.
Over the years we’ve seen a lot of different price risk management problems during the course of our travels. Needless to say, lack of experience is often the culprit. As it is always best to learn from the mistakes of others, we thought it could be interesting to summarize the worst ones we’ve seen.
Welcome to the new CRMA-CRCI website and blog! We hope you’ll find them both informative and useful. They are the “public face” of the new alliance between Commodity Risk Management Associates and Commodity Risk Control, two consultancies devoted to providing commodity price risk management services to clients who require long standing solutions for their unique problems.