PwC released a survey that examined Treasury department’s reaction to the financial crisis, covering both the initial collapse of liquidity and the economic downturn that followed. The survey contained responses from 585 Treasurers, representing 330 multinational companies, from 26 different countries, covering all industry sectors.
The area of the survey that most interested me is when Treasurers were asked where they could add the most value over the next five years. The number one response by a good margin was risk management.
There were four key risk areas identified in the survey: commodity risk, FX risk, IR risk, and counterparty risk (mainly with banks). “The crisis period was not only characterised by an unexpected constriction in the availability of liquidity, but also by unprecedented volatility in FX rates and commodity prices. These market movements have kept treasurers and the wider financial community guessing as to where indices are going next.”
As we’ve said in this blog before, commodity risk is very different than FX and IR risk because of the physical supply chain aspect. “Perhaps more than other financial risks, the hedging of commodity risks need to be coordinated with the business to incorporate the effects on the physical supply chain and ultimate supply and demand dynamics.” Right, but how do you actually achieve this coordination in the real world when buying groups for various commodities are located in multiple geographies around the world and the Treasury is at corporate headquarters? Are emails, phone calls, text messages and spreadsheets the answer? Does anyone think this is a best practice when real-time information is required in a volatile world?
The survey also covered how Treasurers are moving towards more active and aggressive hedging programs. “It appears that the previous standardised approaches are increasingly seen as not being up to dealing with the volatile markets during the crisis.” However, if an organization is going to be more aggressive in its commodity management strategy it better have a good understanding of the underlying markets, employ a team with the appropriate skills and have the software infrastructure to succeed with these new strategies. “In-depth knowledge of the market and informed judgment are required if companies are to benefit from attractive market movements without moving the business beyond its approved risk appetite. This has spurred increasing professionalism in the quantitative techniques used to manage commodity price risks.” “It seems that the need for flexibility and specific functionality in capturing commodity exposures are considered by many to be beyond the capabilities of traditional TMS and that companies consequently have to either develop their own in-house system or simply rely on Excel sheets for the management of these risks.”
A PwC comment sums up what Triple Point has been seeing in non-energy and commodity trading industries – “The evolution in commodity risk management practices does not appear to be keeping pace with the rapid escalation in price volatility and is still some way behind more established treasury activities.”
Early adopters are implementing Triple Point’s market-leading commodity management solution and gaining a competitive advantage over organizations that wait.
All I have to say is don’t wait too long…
Click here to download the PwC survey