Most hedging programmes are still shortsighted, reveals E&Y survey

Written by Commodities Bureau | Mumbai | Updated: Dec 17 2008, 05:51am hrs
Hedging programmes undertaken by companies in India are still generally shortsighted, driven to a large extent by market views and not always aligned with the risk philosophy of companies, revealed a survey conducted by Ernst & Young (E&Y), a global leader in assurance, tax, transaction and advisory services, released on Tuesday on titled Commodity Price Risk Management Survey 2008.

The survey pointed out that though companies understood the need for hedging and had the instruments available, the finer aspects of hedging such as basis risk and timing risk, which significantly affect hedge-cash flows are often ignored.

It is for the first time in the country that a commodity risk management survey has been conducted with a view to throw light on market practices and provide perspective on structuring commodity price risk management operations. The survey captured the views of senior executives from 45 companies across various sectors having exposure to a wide range of commodities including non-ferrous metals, crude oil and petroleum products, precious metals, agro and soft commodities. Responses from companies across the value chain including producers and processors were also taken under consideration.

The concept of commodity-price risk management in India has steadily gained ground. With the increasing volatility and growth in the paper markets, the time is ripe for companies to look at commodity-price risk management as an integral part of the strategy to manage their bottomlines, said Farrokh Tarapore, partner and industry leader,financial services, Ernst & Young. The survey alsop indicated that commodity-risk management operations were not fully geared to protect margins and pointed out a lack of focused and structured hedging programmes.

The unprecedented volatility in commodity markets has threatened structured margins in fundamental businesses like never before. For the first time, price-risk management is being seen as an all pervasive function touching every aspect of the business cycle. Commodity-price risk management is no longer limited to hedging. It is about managing price risk across the value chain, said Hemal Shah, associate director, financial risk services, E&Y.