Commodity risk management survey in 2008

Professional services firm Ernst & Young today released its survey entitled, “Commodity price risk management survey 2008”.The survey indicates that commodity risk management operations are not fully geared to protect margins. The survey also indicates a lack of focused and structured hedging program within companies.

Key findings –

1. Maturity of commodity price risk management operations appears to be greater among producers and processors.

2. Hedging programs are still generally short-sighted, driven to a large extent by market views and not always aligned with the risk philosophy of companies.

3. While companies understand the need for hedging and the instruments available, the finer aspects of hedging, such as basis risk and timing risk, which can significantly affect hedge cash flows, are often ignored.

4. The instruments used for hedging tend to be plain vanilla and are generally limited to futures and forwards. Companies do not generally explore the use of customized instruments, depending on their exposure profile.

5. Companies show an appreciation of the need for oversight.

6. Cash flows from hedges and underlying exposures are generally viewed in isolation. The definition of position, for the purpose of assessing the underlying exposure, is generally vague. This may prevent holistic performance reporting.

7. Mark to market remains the single most important measure used for performance measurement and reporting.

8. Investment in human resources to manage the function is still fairly low and most commodity price risk management functions are staffed by less than five persons.

9. Operational risk is not perceived as a major issue. This has resulted in less than an optimal level of investment in streamlining operations and putting in place a robust control mechanism.

10. There are continuing concerns relating to the accuracy of reporting and accounting for hedging operations.