Commodity Online
MUMBAI: Commodity risk management operations by Indian companies are not fully geared to protect margins and it lacks focus, according to a survey, “Commodity Price Risk Management Survey 2008” released by Ernst & Young.

More than 50% of the respondents viewed hedging as a tool to lock-in input costs at a target level, some of them still used market views and expectations of future prices as a trigger of decision making. Interestingly, more than 68% of the respondents had a hedging horizon of less than 3 months indicating that the full potential of hedging to protect long-term business cash flows was not being explored.

The survey captures views of senior executives from more that 45 companies across sectors having exposure to a wide range of commodities including non-ferrous metals, oil and petroleum products, precious metals, agro and soft commodities. Responses were compiled from companies across the value chain including producers, processors and end-users.

The survey findings indicate use of standardized exchange traded products by more than 81% of the respondents. Relatively simpler instruments like forward and futures were used by more than 92% of the respondents indicating that customized hedging instruments are yet to gain ground.

Governance of commodity price risk management function is critical to ensure that risk management activities are always consistent with the risk philosophy and risk appetite of the company. As per the survey less than 58% of the respondents reported the existence of an independent oversight function while less than 20% have conducted and external review of the function.

Says Farrokh Tarapore, Partner and Industry Leader, Financial Services, Ernst & Young, “While the concept of commodity price risk management in India has steadily gained ground since the early part of this decade, with the increasing volatility and growth in paper markets, the time is ripe for companies to look at commodity price risk management as an integral part of the strategy to manage the bottom-line.”

He further adds, “Stakeholders are expected to demand clear value add from the function and measurable success in terms of protecting margins. Performance and risk measurement through use of statistical measures like value at risk was noted in less than 15% of the respondents. Use of such risk and performance measures is likely to drive performance assessment.”

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