CRMA-CRCI

Strategic Hedging Part 3 – Your Choice of Weapons

Michael Lockwood — Wed, 16 Oct 2019 21:44:52 GMT

In our previous blogs on strategic hedging we talked about the key goals of long term optimization of outcomes, through trade-offs, which brings out the value-for-money of options as risk management tools for end-consumers and producers, rather than the sheer precision of futures and forwards which is more prized by offset hedgers of pass-through commodity processing businesses. The choice of weapons in the options armory, an ongoing process of changing choices, is more complex than simple offsets, and harder to explain to colleagues and shareholders. We offer here a few guidelines for success – and survival – to those strategic hedge practitioners who are in the front lines of, in this example, an end-consumer of aluminium.

Strategic Hedging in Metals: Practical Lessons from Past Disasters

Michael Lockwood — Fri, 30 Aug 2019 21:19:21 GMT

“Get your things and report to the mailroom!” In parts of the metals industry the mere mention of strategic hedging can have career limiting effects. Yet price risks that require a discretionary approach to hedging are so common and impactful. Almost every major class of metals business is shaken by the financial volatility they cause, whether it be producers with price risk on sales of future production, processors with risk on permanent inventory and sales of metal gains or consumers with risks on future raw material purchase prices. Yet for strategic hedging, the specter of legendary past disasters looms above like some radioactive miasma, prompting many managers to adopt the ostrich position. Ignored are the successes that exist and with enough frequency that they are no accident, particularly among consumers. Our ostriches could in fact be looking at disasters upside down. Far from portending certain doom, past calamities hold valuable lessons on must-avoid practices for good hedge process design.

Why is Strategic Hedging Having a Revival These Days?

Michael Lockwood — Fri, 06 Apr 2018 15:28:49 GMT

There was a time, not so long ago, that metal producers saw textbook opportunities to lock in forward revenue with strategic sell hedge programs. And it was a good move, until China’s huge and unexpected expansion turned the hedges into disasters. Strategic hedging almost became extinct. Not so for consumers however, some of who laid on strategic buy hedge programs that have since served as role models for their industries. Since then, from both perspectives, lessons have been learned and mistakes have been avoided and that has lead to financial outcomes that have, in the most part, been optimized.

Hedging Inventory Part Three – How Much Risk do you Really Have?

Michael Lockwood — Thu, 08 Feb 2018 17:56:46 GMT

One man’s inventory is not another’s, but If metal price volatility has weaponized your inventory so that its value swings lay waste to your financial results, then it’s a problem you need to get a grip on. Many metal processing businesses face this exact issue but find that quantifying the price exposure it contains is trickier than assumed. Production people measure metal inventory by tangible presence, accountants deem it to be what’s under operational control but risk managers must know volumes based on pricing events (Stock-At-Risk SAR). Rarely if ever are the three equal either; in fact they can be significantly different. We’ve seen operations with enough physical and accounting inventories to make an asset manager cringe, but when it came to SAR, they were inventory negative. Strange but true, and the reverse is just as possible.

Hedging Inventory Part Two – Optimization, Optimization, Optimization

Michael Lockwood — Fri, 19 Jan 2018 19:41:35 GMT

You know what they say are the three most important factors for successful property owning – well it is the same with hedging metal units in inventory, or, more correctly, Stock-At-Risk – not location but optimization. Transactional, Cash Flow Hedging should be relatively straightforward so that while the expression “Perfect Hedge” is not always practically possible, it is the right way to aim. Not so for hedging Stock-At-Risk. Neither automatic execution nor perfection is possible. The use of informed disciplined management judgement is the key ingredient and the goal is to be able to say after five years that the overall financial outcome has been significantly better than doing nothing.