Michel ZadoroznyjIf you get the feeling that we’ve been here before, you’re right. I’m talking about the convergence efforts of the two accounting standards organizations - FASB and IASB.  After all, they have been at it for nearly ten years, so the probability of my addressing it at one time or another are quite high. Well, at the end of January the two boards renewed their efforts to find common ground in the development of standards and disclosure requirements. “The boards have been urged to converge their standards on financial instruments. Today's decision to work together on key differences—which represent the most significant remaining differences between the decisions reached to date—is responsive to stakeholders in the US and abroad”, said FASB Chairman Leslie Seidman.  A commitment with a rhyme - what could go wrong?

As an optimist, I want to believe that it can happen, and there certainly are signs that indicate that it just might come to fruition. Of course, if you’re a pessimist, you are just as likely to find many signs to indicate that it won’t happen.  If the renewed talks aren’t enough evidence for you, then you may want to consider a staff paper that the SEC issued back in May, 2011, titled “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers”. That paper explores the incorporation of IFRS, and is essentially an approach combining elements of convergence and endorsement, thus coining the now popular phrase, “Condorsement”.   With an endorsement approach, jurisdictions would simply incorporate an individual IFRS standard into their standards, while a convergence approach keeps local standard and attempts converge them with IFRS. The condorsment approach suggests a phased one, where the scheduled convergence projects continue to move forward while seeking areas where endorsements of individual IFRS make sense.

The concept of allowing corporations to adopt IFRS reporting is not that new. It was first pitched in 2008 by then SEC Chairman Christopher Cox, and there now seems to be some serious momentum behind the proposal. Even though the SEC recently delayed its decision on the topic, IASB  Chairman Hans Hoogervorst remains confident that SEC will ultimately decide to go with IFRS. In a recent speech given at an Ernst & Young IFRS seminar in Moscow, Hoogervorst stated, “The US already has developed a sophisticated set of financial reporting standards over many decades. Transitional concerns have to be carefully considered. That is why I have supported the general approach for the endorsement of IFRSs described by the SEC staff’s work plan. It is also important to note that the US is committed to supporting global accounting standards. It is SEC policy, it is US Government policy and it is the policy of the G20, in which the US is a key player. “  

Most of the G20 member countries currently require the use of IFRS. Also, more than a hundred countries globally currently allow or require IFRS reporting.  Detractors call IFRS Euro-centric. I find that interesting, since much of the seeding for the standards in IFRS were a result of groundwork laid out by FASB. In a global economy, it is essential that we end up with a uniform approach. So let’s keep it moving along - make it international and rational.  I love rhymes.


Deloitte just released an outstanding report, Tracking the Trends 2012, on the top 10 issues mining companies may face in the coming year. Some of the top challenges include rising capital costs, commodity price chaos, government taxes, and growing labor shortages. Many of these issues have a familiar ring. However, the Deloitte reports warns that: “The factors influencing the global mining industry are moving to a new level of extremity.”

The report is full of practical suggestions to tackle the top challenges, including new strategies to:

  • Bring costs under control
  • Manage commodity price volatility
  • Improve capital project management
  • Attract financing
  • Mitigate the risks of diversification and
  • Plan for unforeseeable amid greater volatility
Other key takeaways include:
  • Many opportunities remain to use automation as a tool to fight cost inflation      
  • Improved forecasting is needed to handle greater commodity price volatility
  • Key challenges have reached a new level of extremity and require improved collaboration across the entire global enterprise

Vale, Rio Tinto, American Anglo, and many other leading mining companies are fostering improved collaboration by using Triple Point’s end-to-end mining software solution, QMASTOR Pit-to-Port, to provide an integrated view of their global supply chain. This enables them to improve operations and maximize profit through efficient use of resources.  What are you doing to ensure consistent practices and communication across your entire global enterprise? Could an integrated view of your mining operations drive profits to a new level in 2012 and beyond?

Read the full Deloitte report.

Sirius-Solutions-LogoRecognizing that it needed a state-of-the-art software solution to effectively manage derivative valuation and hedge reporting for its clients, business consulting services firm Sirius Solutions chose Triple Point’s Commodity XL for Hedge Accounting™. Sirius is the latest in a long line of companies who are realizing that they need sophisticated technology solutions in order to manage the numerous, complex regulations that make hedge accounting a herculean task. The firm will be using Triple Point’s solution to automate the entire hedge accounting process and assist clients with hedge decision making, curve validation, mark to market valuation, financial reporting, and compliance.

In a recent press release Kristi Chickering, CEO of Sirius Solutions, commented: “An upgrade to our proprietary valuation solution was essential due to the growing and complex needs of our clients. Commodity XL will enable us to enhance our existing capabilities and provide more robust documentation while delivering the same deep hedge reporting, derivative advisory solutions, and superior service that our customers have come to depend upon.” 

Learn more

Sempra was an amazingly successful commodities trading organization in the 1990s and 2000s before forming a joint venture (being sold) with RBS in 2008.  At one point, Sempra had 44-straight profitable quarters.  I recently read a very interesting article about how newly-formed Freepoint Commodities, which launched its North American operations in March of 2011, is really a “restart” of Sempra.  David Messer, the former CEO of Sempra, is the CEO of Freepoint.  In addition, roughly two-thirds of Freepoint’s employees are former Sempra employees.

I particularly liked this quote by Mr. Messer: "We started trading in June and I think that's fairly remarkable to launch on March 1 and be trading 3 months later. I think that's testimony to the fact we've been able to reassemble a team that is highly experienced and has worked together. We're currently ahead of our plan."

I’ll add from a Triple Point perspective that’s it’s also important to choose the correct Commodity Management partner and solution.  Triple Point was able to implement Freepoint’s platform quickly to support its business requirements and also provide the robust functionality to support Freepoint’s rapid growth plans into additional commodities across the globe.

Enjoy,
Michael


The Commodity Management Blog has been closely following the top Commodity Management issues throughout the year. Not surprisingly, posts discussing Dodd-Frank top the list.  Below is a complete list of the 10 most popular posts over the past 12 months based on views and shares.  We thank you for following us and hope these posts have provided valuable tips on how to manage commodities smarter.


We have some really great things in store for 2012, so here’s to a year of fresh ideas for Commodity Management!

With the start of the new year, the US Legislature did not renew the 45-cent-per-gallon tax incentive for producing ethanol-blended gasoline or  the 54-cent-per-gallon tax on foreign ethanol imports.  The incentive cost taxpayers about $6B per year.  This ends thirty some odd years of government support for the biofuels industry.

The real beneficiary could be Brazil’s sugarcane/ethanol industry.  UNICA, the Brazilian sugarcane industry association, issued a press release titled “Time for the world's top two ethanol producers, the United States and Brazil, to lead a global effort for increased production and free, unobstructed trade for biofuels.”  According to Leticia Phillips of UNICA, “This means that in 2012, the world's largest fuel consuming market (US) will be open to imports of less costly and more efficient ethanol, including sugarcane ethanol produced in Brazil.”

It will be interesting to see how the US biofuels industry fares in 2012 and what the change in policy will mean to corn prices.

A December Financial Times article that reported oil price volatility in 2012 could swing between $50 and $150 a barrel might prove quite prescient.  The story, “Fat-tail fears catch oil traders between $50 and $150 bets,” noted that investors are concerned about events that could cause large swings in oil prices.

On the one hand, eurozone debt issues could drive oil prices much lower, but on the other hand, a crisis with Iran (or elsewhere in the Middle East) could send prices much higher.  In the last few days, we’ve seen the saber-rattling between Iran and the US send Brent crude rising by more than $4 in a day to $111.

At the risk of stating the obvious, the commodity volatility trend of recent years will continue in 2012. Rapid and large price swings are not going away - if anything, volatility is getting more extreme.  How commodity volatility is managed will be an incredibly important factor in determining company profitability moving forward.

The key phrase for organizations doing business in these volatile markets is “risk management.”  With the proper processes and systems in place, risk can be turned to competitive advantage.

Here’s to a profitable 2012 for all!

Out of all the changes put forth in IFRS 9 with regard to Hedge Accounting, one that will likely be well received will be the ability to hedge the risk components of non-financial items.  This is big news to many companies out there, in particular the foods industry and airlines.  Under IAS 39 and current FASB rules, they are not allowed to isolate the risk associated with a component of the risk being hedged.  For instance a company that produces baked goods must hedge the overall cost of flour and cannot simply isolate the cost of the wheat component to qualify for hedge accounting. Likewise, an airline cannot hedge crude oil as a component of it forecasted jet fuel requirement.

The current standard requires that the entity compare the entire change in value of the hedged item with the change in the value of the hedging contract to prove effectiveness.  Due to changes in other variable costs, such as milling costs in the case of flour, or refining margin, in the case of jet fuel, derivative contracts may not always correlate well.

Certainly, the economic aspects are intact regardless of whether or not the hedge actually qualifies for hedge accounting under the accounting standards. The consequences would be undesirable income volatility, since the gains or losses of unqualified derivatives must be taken into income immediately and would not match up with the actual timing of the risk being hedged. 

An important precept in IFRS 9 regarding component risk is that there is no need for a component to be contractually specified in order to be eligible for hedge accounting.  This should not be interpreted as an anything goes clause.  IFRS 9 guidance states that the component risk, when not contractually specified, must be “separately identifiable and reliably measurable”.  This will certainly be easier for some markets than others.  When the component risk isn’t clearly spelled out in a contractual specification, it may be require a bit of effort in determining the influence of individual components to price of the end product. 

As was the case under IAS-39, proper documentation is essential to qualify for hedge accounting.  From a hedge documentation perspective, you will need to clearly identify your risk if you are electing to hedge a component.  You will need to also state your method of assessing hedge effectiveness as well as your anticipated level of effectiveness.  Since IFRS 9 now allows the rebalancing of hedges, it will be necessary to fully document any hedging relationship changes on an ongoing basis.

 For many companies, where the economics and value of hedging have always been apparent, adopting IFRS 9 may now allow them to finally achieve the accounting benefits.

Now if only we can get to the long awaited convergence of IFRS and US GAAP, wouldn't that be nice?

For more information about hedging the risk components of non-financial items, see Ernst & Young’s Hedge accounting under IFRS 9 Guide (pages 8-10).

 

IBJ Awards 2011Triple Point’s QMASTOR PortVu bulk terminal management system has won the prestigious International Bulk Journal (IBJ) IT Solutions Award and was recognized for delivering a significant, measurable return-on-investment. 

QMASTOR PortVu was honored with this award because it is the only complete, integrated bulk terminal management system that manages all the complexities of port operations. It is a proven, multi-lingual solution that is being used across the world by leading resource companies and terminals. PortVu optimizes decision-making and delivers substantial cost savings by integrating terminal operations with suppliers, customers, transport providers, agents, laboratories, and other supply chain partners through one common platform.

The award follows on the heels of Triple Point’s acquisition of QMASTOR, the premier provider of mining software solutions to manage the tonnage, quality, and value of coal and mineral supply chains from "pit" to the point of export, import, or consumption. QMASTOR’s advanced solutions manage and optimize all aspects of mining supply chains including mine planning and scheduling, material tracking, logistical movements, 3D stockpile modeling, grade control, blend management for coal, and other minerals such as nickel and iron ore. QMASTOR also offers solutions for managing port operations and metallurgical accounting.

QMASTOR solutions are a perfect addition to the Triple Point portfolio because they supply all the functionality to optimize an end-to-end coal and mineral supply chain, while at the same time being completely complementary to the rest of the Triple Point product set. The companies’ complementary customer bases, target markets, and product sets create substantial opportunities for continued and accelerated growth.

Research and consultancy firm, Finadium, published an interesting report last week on the challenges that new regulations (MiFID and Dodd-Frank) are set to bring collateral management for OTC trading. The report highlights how dramatic the changes are going to be, and according to the market participants they interviewed, how technology is the only viable solution to effectively manage collateral in a post regulation world.

MiFID and Dodd-Frank central clearing mandates are going to change OTC trading forever. The increase in cash collateral requirements and daily margin calls will have a large impact.  According to a recent Bloomberg article the cost of central clearing could setback Europe’s electricity market by up to $93bn.

While decreasing counterparty credit risk, central clearing will bring huge operational risk. Daily margin calls will make position and liquidity management impossible on a manual basis. Additionally, firms with non-standard trades that cannot be centrally cleared, or who are exempt from clearing, need to manage a ‘mixed’ collateral environment which only adds to the complexity and need for automation.

Effective collateral management needs to become a key feature in pre-trade decision making, where costs of collateral may affect where, whether and how to engage in a trade. So, not only is effective collateral management required from an operational point of view but it will be vital to drive the best trading decisions.

In its conclusion the report highlights that the majority of participants have started to look for collateral management solutions now, rather than wait until the regulations have taken effect. Have you started to think about this? With changes this far reaching can you afford not to?

The full report can be downloaded from here: www.omgeo.com/reportswhitepapers

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Events

Procemin 10th International Mineral Processing Conference

October 15-18, 2013 | Chile

XXV Brazilian National Meeting of Mineral Treatment and Extractive Metallurgy (ENTMME)

October 20-24, 2013 | Brazil



Opinions expressed on this blog are those of its individual contributors, and do not necessarily reflect the views of Triple Point Technology, Inc.