Corporates Hedge More Energy Commodities due to Economic Crisis

Corporates around the world are hedging a growing proportion of their commodities exposures as they grapple with soaring levels of volatility and risk amid an historic economic crisis.

Large companies in North America, Europe and Asia used derivatives and other financial products to hedge an average 55% of their energy commodity exposures in 2008, up from 45% in 2007, according to the results of Greenwich Associates’ 2009 Global Commodities Research Study. This trend was driven by refiners and producers of energy commodities, which together increased the share of their exposures hedged with financial products by some 20%.

Companies are centralising responsibility for both decision-making and day-to-day operations in OTC energy derivatives – most often in the treasury department. At the same time, companies are formalising their hedging policies and elevating decisions about overall policy and specific strategic trades to the level of the treasurer, CFO, CEO and even the board of directors. More than 85% of large companies have adopted formal, documented hedging policies for energy commodities, including 100% of the 35 airlines participating in this study.

Increasingly, decisions about these policies are being made by C-suite executives. In 2008, 96% of companies said C-level executives were responsible for setting and reviewing hedging policy, up from 75% in 2007. Almost 55% of companies in 2008 reported that these duties fell to their CFOs, up from just 40% in 2007. Also in 2008, one third of companies said their CEOs were responsible for setting and reviewing these policies – up from 23% in 2007 – and just more than 30% said their boards of directors were involved – up from only 21%.

A similar trend is visible when it comes to making final decisions about strategic energy transactions. “Decisions are being raised to the C-level because these transactions have the potential to mitigate the kind of dramatic P&L swings seen in 2008, and because they are often related to strategic investments and acquisitions,” says Greenwich Associates consultant Frank Feenstra.

The following corporate hedging policy benchmarks are derived from the results of Greenwich Associates’ Global 2009 Commodities Study:

  • Approximately 70% of companies say they reformulate their energy commodities hedging policies at least once per year and some 30% do so even more frequently.
  • More than three-quarters of large companies set formal limits on how far out they will hedge exposures. Eighty-five percent of companies report the tenor of their typical hedges as three years or less, with the most common tenor being from one to three years.
  • Forty-three percent of companies roll over their energy commodities hedges at least once per month, a proportion that reaches 50% of all airlines and almost the same share of chemical and industrial companies.
  • Almost 85% of companies account for their commodities price hedges on a mark-to-market basis, with the remainder using a cost-accounting basis. Among energy producers, fully 90% account for price hedges on a mark-to-market basis.


Related reading

New consumer banking head for Citi Asia Pacific