How does hedging really work for raw materials?

Securing of raw materials crude oil

Oil is one of the raw materials with the greatest price fluctuations. Between spring 2018 and spring 2019 alone, the volatility was around 31 percent. Companies that want to protect themselves against these high price fluctuations and other raw material risks have professional partners in the experts at Commerzbank. Michael Alt, Head of the Commodities Advisory & Distribution Team, explains in an interview what is important in the risk management of the raw material crude oil and mineral oil products.

Mr. Alt, what significance do crude oil and the products made from it have for German companies?

Michael Alt: The importance is enormous. In the transport sector alone, according to the Federal Environment Agency, a total of 94.3 percent of energy consumption was attributable to mineral oil products in 2017. These include fuels for trucks, ships, planes, trains and local public transport. For comparison: the average in the industry was 3.6 percent. However, the proportion can of course be significantly higher for individual companies.

Transport and logistics companies are primarily affected. Here the proportion of fuel costs is between 30 and 35 percent of the total costs. Large price fluctuations have a major impact here and thus directly influence the company's economic success. This also generally applies to companies with a large fleet of vehicles or high logistics costs: for example, a large bakery that supplies its 200 branches with fresh baked goods every day, or the discounter, which also has to supply numerous branches on time.

The oil price is influenced by many factors: a hurricane in the Gulf of Mexico, US sanctions against Iran or production restrictions by the Organization of Petroleum Exporting Countries (OPEC). How can companies keep an overview?

Commerzbank offers its customers * a very extensive range of information on this area. Incidentally, this applies to the entire raw material sector. For example, we send out the “Daily Raw Materials Information” briefing every day with current information on developments in the energy sector, precious and industrial metals and agricultural raw materials. The weekly analysis "Raw materials compact" deepens this information for current individual topics. And with the “Raw Material Radar” newsletter, every three months we show the volatilities that companies have to be prepared for.

Are there any other factors that companies should consider in this area of ​​risk management?

In principle, there is a potential additional currency risk with raw materials and thus also with mineral oil products, since numerous raw materials are traded in US dollars. Commerzbank customers have the option of concluding their hedging transactions with us directly in euros. Alternatively, the currency risk can be hedged separately. An additional risk may arise in emissions trading.

In what way?

Particularly energy-intensive companies, energy suppliers and airlines are obliged to participate in EU emissions trading and must offset their CO2 emissions with emissions certificates on an annual basis. The price for emission certificates has increased enormously and has risen from under 5 euros in June 2017 to more than 25 euros at times in the course of 2019. A very interesting development in this segment is that the number of companies that buy emission rights in order to be able to offer CO2-neutral services or products on a voluntary basis or to make their business operations CO2-neutral as a whole is growing steadily.