Commodity Hedge Management: How to maintain costing certainty despite volatile markets
In recent years, it has become increasingly apparent that commodity markets are particularly susceptible to crises. These cause enormous volatility in procurement prices, with immediate and long-term effects on costing certainty for companies, especially in the industrial metals sector. Many treasurers are therefore considering not leaving the hedging of these price change risks entirely to purchasing, but rather hedging the volatility in raw material prices through additional hedging transactions.
The world market for raw materials and its challenges
Geopolitical events, inflation and rising production/transport costs are major factors behind rising raw material prices. This price volatility jeopardizes the planning security of many companies and leads not only to falling margins in the operating business, but ultimately to increased liquidity requirements as well. Companies that process precious and non-ferrous metals are particularly affected.
Nickel price and stock (in USD/Ton, LME) | Source: Westmetall.com (05.07.2023)
Nickel price and stock (in USD/Ton, LME) | Source: Westmetall.com (05.07.2023)
Conventional methods of keeping the prices of the raw materials used as constant as possible often reach their limits in the face of increasing market volatility. For example, supply contracts with fixed price agreements can often only be realized with an insufficient time horizon. In addition, if price distortions are too high, the agreements cannot always be fulfilled by the supplier and thus become ineffective. On the other hand, price escalation clauses with customers can also only be implemented to a certain extent, as the market position and control of the players play a key role here. Therefore, many treasurers of affected industrial companies increasingly consider it necessary to additionally hedge commodity price change risks by derivative financial instruments. With S/4HANA Release 2022 FPS01, SAP supports the management of commodity exposures and derivatives in the Treasury and Risk Management module.
Essential functions and advantages of SAP Commodity Hedge Management
With Commodity Hedge Management, SAP offers a holistic hedge approach that covers the entire process from exposure definition and management to the recording and valuation of hedging instruments and reporting. For example, hedge books can be implemented with target quotas that can be set up for different time horizons.
The defined target quotas are used to trigger specific hedge requests, on the basis of which the financial instruments (e.g. swaps) are settled in a user-friendly and transparent manner. In this context, it is also possible to record transactions automatically “on-behalf-of” subsidiaries with the corresponding mirror transactions. Since commodities are often traded in USD, linked currency hedges can be triggered directly by means of a hedge request in parallel. With the commodity extension, standardized commodity hedging transactions are valued and posted in a fully automated manner – completely integrated in SAP’s TRM standard. The integration of the solution into financial accounting can be implemented here with or without a hedge accounting approach.
The establishment of standardized processes from the creation of hedge books with target quotas and hedge requests to hedge settlement enable very high process efficiency and transparency. Coupled with the familiar functions of the SAP Treasury and Risk Management module (separation of duties, position management, etc.), individual requirements can be implemented along the entire workflow in an end-to-end process. This is made possible by the module components in the SAP S/4HANA system, which build on each other. The data processed in SAP Commodity is prepared in real time with the help of reporting and analysis tools in a way that is appropriate for the target group.
Further advantages for our customers: In addition to the workflow for complete hedge management, the app-based reporting provides the basis for quick decision-making and a presentation of hedge successes. This enables the possibility of continuous improvement of the overall process and strategy. The processes established in this way can then be easily extended to subsidiaries (OBO) or transferred to other commodity groups.
We support you in the implementation of Commodity Hedge Management
Volatile commodity markets will continue to be an increasing threat for companies in the future. The effective use of derivative financial instruments increases the costing certainty and thus the financial stability of commodity-intensive industries. By implementing SAP Commodity Hedge Management, our customers can manage the complex process efficiently and clearly. Integration into the SAP system landscape enables holistic reporting and meaningful analyses.
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Convista combines expertise and a hands-on mentality to develop the right solution for our customers’ specific needs. We invite you to contact us and discuss together how we can support you in implementing Commodity Hedge Management.
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Christian Pies