Risk Management Commodity Markets Commodity Markets Risk Management for the Chemical Industry

Editor: Dominik Stephan

The commodity markets are fluctuating: after speculators drove prices to an all time high, the recent credit crisis saw a sudden decline. The volatility and the rapid, unpredictable nature of the commodity markets make risk controlling an important task, especially for the resource intensive chemical industry.

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Unpredictable changes on the commodity markets create the need for a potent risk management system. (Picture: [M] IKB)
Unpredictable changes on the commodity markets create the need for a potent risk management system. (Picture: [M] IKB)

"The commodity markets are far from being fully developed," state Consulting specialist Pricewaterhouse Cooper. Most of the products and raw material of the chemical industry are not traded on forward markets or face only illiquid futures. To use derivative security measures is therefore both difficult, and, because of the contangos on small markets, cost intensive.

Traditional Risk Management Needs to be Reconsidered

Nevertheless, the consultants underline the importance of a well balanced risk–management to secure commodity price risks for the industry. Derivatives are still quite often traded on single case basis. Establishing a working risk management for commodity prices is quite difficult: most companies, but also most treasurers are inexperienced – no wonder: the market for commodity derivatives, especially for chemical products and feedstock, are still young.

Treasury of chemical companies traditionally focused on protection against liquidity, interest or currency risks risks. Well proven mechanisms for these fields quite often don't work for commodity markets. Even treasury–management–systems can be unable to cope.

Long Term Binding Contracts Secure Commodity Price Risks

Securing commodity prices for the chemical industry is often done via liquid and fully tradable pre-products like crude oil and naphtha. Changing prices for the processing of these basic feedstock nevertheless greatly reduce the effectiveness of these measures. Furthermore, the prices for pre-products and other raw materials do not develop unisonous. Industry experts therefore recommend to couple feedstock prices with securable pre–products in long–term contracts.

Although analysts regarded the high prices for different raw materials earlier this year as overstretched, prices could well rise again in the second half of 2011. How the recent debt crisis of the U.S. and several European economies affects this development is yet unclear.