Moving core treasury activities from one side of the world to the other in less than six months is no easy undertaking so it had better yield a decent return. Treasury Insights hears how Rio Tinto fared on its voyage towards the first ever Commercial Treasury function at the recent J.P. Morgan Asia Pacific Treasurers Forum.
“Fundamentally reorganising treasury and redefining its purpose” is how Abel Martins Alexandre, Head of Commercial Treasury, Rio Tinto, describes the focus of the past 12 months.
With the firm’s global treasury dealing, operations and cash management having been lifted and shifted from London to Singapore in less than six months between October 2016 and March 2017 as part of the creation of its Commercial Treasury unit, it becomes the first multi-national to make such a significant and focused move.
What makes the move all the more significant is that all the credit and trade finance, and commodity derivatives activities, which were previously decentralised across the business with different processes and practices, have also been centralised in the same timeframe within the same global Commercial Treasury platform. The risk management function has also been strengthened with a key focus on risk analytics reporting, and controls.
A new type of treasury
Commercial Treasury presents a relatively unusual model. It has multi-market (commodity, foreign exchange, rates, liquidity – working capital and investments) dealers and trade finance experts that can leverage insights across the markets, provide informed assessment of the forward value of commodities and working capital to be built into prices for customers and provide risk management support to the business.
The last piece of the re-organisation jigsaw is the implementation of one technology platform across treasury and financial products. This provides increased visibility, process efficiency and risk management capability. With work on upgrading its current trading and treasury management systems into a single integrated solution now at the design and implementation phase, Rio Tinto treasury clearly has no issue with moving its own goalposts in order to achieve the right outcomes.
With Commercial Treasury continuing to improve and strengthen its controls around risk management, it is set on a course that allows it to provide a unique platform and foundation for a working capital centre of expertise and more options for market-based, risk-adjusted pricing for financial assets and liabilities, financing solutions for its customers, and, in doing so, add value to the business as a whole.
“In Rio Tinto, we have significantly focused our approach on maximising cash from our world-class assets, and on disciplined capital allocation and capital management,” says Martins Alexandre. “This has translated into strengthening of our balance sheet, improving our performance, and delivering strong financial results,” he adds.
Treasury is now also focusing on better meeting its customers’ needs and driving higher value-chain and commercial excellence. Indeed, this is where treasury has to reinvent itself and become much more of a business partner.
The move to Singapore does not sever the connection with London, explains Martins Alexandre. Rather, it helps the other treasury teams to re-focus on their core purpose and areas of expertise whilst still working as an integrated global treasury team. Rio Tinto Treasury also comprises corporate finance and capital planning, structured finance, risk insurance and pensions. These are all under the leadership of Paul Hedley, who joined Rio Tinto in January 2017. London, notes Martins Alexandre, primarily looks at the long-term end of the balance sheet, and Singapore with commercial treasury looks after the short-term end of the balance sheet.
The reason for the move to Singapore is found in a business reality where, despite the group continuing to have a global footprint and customer base, 70% of it is weighted towards APAC region: Singapore is the epicentre of its trade flow.
The move also reflects a conscious focus to drive ‘mine-to-market’ value by substantially centralising its sales and marketing, and procurement activities in Singapore, aided in part by the recent appointment of a Chief Commercial Officer. The broader treasury transformation is to fully be a part of the mine-to-market approach; it becomes a business partner in value creation which, says Martins Alexandre, is better achieved through an agile decision-making environment, where commercial resources are together with best practices and processes are continuously improved.
In re-thinking the role of treasury, Rio Tinto is going beyond the everyday business of treasury, redefining its very purpose. As Martins Alexandre puts it: “as experts in trading, treasury, risk management, credit and trade finance, we partner with the business for sustained value creation”.
Breaking the silos
Centralising a number of activities that were previously dispersed across the different product groups requires a good dose of change management, with sponsorship from the very top. The driver for the creation of Rio Tinto’s Commercial Treasury function has been its ‘mine-to-market’ approach to value chain and commercial excellence. Thus, to succeed in its alignment with the business, treasury has had to depart from its own perceived cultural and operational silos which were, at times, preventing certain decisions.
In this context, Martins Alexandre believes that “re-defining treasury’s very purpose and becoming an integral part of the commercial organisation” were fundamental aspects of the transformation. Commercial Treasury measures its performance by how much value it creates without detriment to its custody of risk and of the balance sheet. “Commercial Treasury in Singapore is now an active participant in the journey to commercial excellence, rather than a mere supporting function, reactive to the business,” he states.
Its business customers are the commercial organisation, sales and marketing, and procurement. Martins Alexandre sees his team being embedded in their value delivery as an imperative. “And when we are clear and transparent about our purpose as partners to the creation of value in the business, this starts the conversation on a completely different footing.”
Transparency, he believes, comes from measuring performance across dimensions such as effectiveness, efficiency, control and value creation. This helps to ensure that the dynamic of the relationship between treasury and the business is positively impacted, creating a culture of risk-informed decision making and continuous improvement.
In practical terms, with enhanced risk management playing a key part in the redesign, in addition to the broader conversations being held, visibility of data has become a matter of greater importance for the Commercial Treasury team. Around this it has built a toolset, that includes sensitivity and stress testing and Value at Risk, to help measure risk exposures when seeking to create value. There may be circumstances where taking a different risk profile from that stated in the policy may make sense. “In this case, the use of risk management tools is very helpful in driving decisions,” comments Martins Alexandre.
Next week we look at what has been achieved to date.