Service Type: Physical Commodity Risk Management
Project: Commodity Hedging Strategy
Context:
Our client faced significant energy spend and needed to eliminate its energy cost volatility.
Approach & Results:
Approach: We created a hierarchy of energy risks based on dollar spend impact, including process-usage of natural gas, on-road diesel, and electricity. Key to project success was establishing a secondary protocol related to determining the existence of established hedging mechanisms and basis risk instruments.
The solution was delivered over a period of years:
- Established price and decision protocols for hedge volumes, target prices, acceptable strategies, and authority levels for specific supply chain and treasury personnel.
- Led meetings and negotiations with suppliers to create and negotiate terms for pricing strategies.
- Worked with suppliers to create methods to fix prices on products.
- Utilized indexed and derivative pricing when futures exchanges were not available.
- Delivered risk management mechanisms via both physical products and financial instruments.
- Enabled customer to minimize futures and swaps positions, reducing working capital related to variation margins.
- Established protocols for periodic market and strategy reviews.
- Provided weekly market fundamental updates and strategy discussion to key energy markets via print and phone.
- Provided data and price modeling expertise.
- Created a reporting system to provide position transparency to the C-Suite and Risk Committee.
- Provided quarterly fundamental and strategy discussions with CEO and CFO.
Results: Provided consistent energy spend at or below budget. Significantly reduced volatility in multi-commodity energy categories. Simplified hedging decision process and reduced execution time.
