The best time for a sailor to set the rigging, stock up on suppliers or plot a course is when seas are calm and the wind gentle.When the wind is roaring and the swell is heavy they need to focus on seamanship and they need everything in order. The same is true of commodity risk management. When hedge funds are pouring into a market and speculating up prices, and emerging market demand is roaring, and floods in Chile are cutting into global stockpiles, a buyer needs all their focus to be on hedging. They need the right frameworks, policies, systems and tools in place to support their efforts. They do not need to be ‘re-rigging’ his sails as the market turns against them.

If we think of commodity markets as being like seas – i.e. they can be calm with steady, low prices and low volatility. Or rough with high or climbing prices or both and high volatility – then we are in the calmest global commodity markets in the past decade. The 2013-2016 rebalancing of the Chinese economy from export manufacturing towards internal services, weak GDP growth in Europe and America, and strong supply across the commodity complex suppressed commodity prices from 2010 to 2015. As prices levels fell so did speculator and day trader profits which lowered market volatility. Prices have picked-up from early 2016 lows for most commodities, however, but market volatility remains calm. Below shows the last 7 years of market activity in commodities using the Thomson Reuters and Bloomberg commodity indices.

This is a paradoxical situation for a market hedger and risk manager. On the one hand low prices and low volatility means there is little pressure on them to act. Their margins are not under pressure and their month-to-month positions are not swinging wildly. On the other hand, without pressure from commodity markets procurement and treasury teams can become complacent. There is very often little done with these rare opportunities to shore up a company’s defences against commodity risk and build up capacity to hedge and monitor markets. The best time to strategize and reassess policies and processes to deal with commodity risk is when there is relatively low commodity risk. Much like our sailor will check their lines and patch up their boat when the sea is calm, the best time to prepare for commodity risk is when markets and calm. At Flow&Ebb we often find our clients look for our help when markets are rising and are volatile, which adds a layer of extra complexity to prepare them to deal with commodity risk.

Commodity market professionals understand that suppressed prices and calm markets will not last, and we are now starting to see market volatility will pick-up. Energy and industrial metals markets are climbing upwards which is pulling back in day-traders and other speculators, which boosts volatility. Some small markets like Platinum are accelerating ahead of the complex as rebounding economic growth in Europe, North America and the emerging markets drives up demand and erodes stockpiles. Agricultural markets remain suppressed from high supply overhangs, but we are seeing signs of the bumper harvests of the 2010’s ending.

The commodity supercycle theory states that commodity markets go through 15-20 year cycles of boom and bust. In 2015 many commentators suggested we were at the end of a supercycle and a new one was beginning. If this is true – and we can’t say for sure – then we’ll start to see a steady, but perhaps not rapid, increase in commodity market prices throughout 2018. As we approach the end of the year its likely that we will see higher prices and higher market volatility. We cannot say for certain if this will happen, but we can say for certain that 2018 will be a good year to brush off commodity risk policy and reassess them, and to explore new processes and systems for dealing with commodity risk before rising prices come knocking on the door.

About Flow&Ebb:

Flow&Ebb enables organizations to manage the impact on their cost base of volatility in commodity markets.

We help you to measure and manage your risk exposure, reduce costs, improve profit margins and make more informed trading decisions. Our clients are large corporates, typically in the manufacturing, retail, FMCG and pharma sectors, which have commodity prices driving a significant portion of their cost base, but their core business lies elsewhere.

By commodities we mean all and any commodity for which there’s a liquid market traded on an exchange (agricultural, livestock and meats, metals, energy, plastics, fats and oils, etc.).
There are two sides to the business:

ADVISORY & CHANGE MANAGEMENT: Working hand-in-hand with clients, we show them how to set-up and run price risk management (i.e. hedging), or improve the effectiveness of their existing activities.

TECHNOLOGY: Our cloud based platform, AMORisk.com, helps clients solve the problem of how to govern their risk management processes within a cost effective, automated and dependable environment.

For more information, visit www.flowandebb.com or e-mail [email protected]