Treasury teams are relying on risk management and hedging strategies to navigate commodity price turmoil as war in Ukraine worsens. Experts also note that shipping data can help navigate supply chain disruption, expected to get much worse ahead.

Events in Russia and Ukraine have unleashed exceptional commodity price moves with implications for long-term supplies of raw materials from oil to metals and agricultural goods.  Even before the war, companies’ inventory levels for many commodities were squeezed. Now the war has sent prices to record highs, with implications for treasury teams who have put risk management and hedging strategies centre stage.

“Asahi Europe & International has always had a Treasury Risk Management Policy which sets strict guidelines for commodity and currency risk management. We hold monthly Risk Management Committees chaired by our Group CFO to monitor the Group’s Commodity and FX risk and mandate certain risk management strategies,” explains Anthony Buchanan, Head of Treasury for Japanese beer maker Asahi’s European and international treasury operations.

Geopolitical risks and the impact on already scarce commodities has increased the frequency of these discussions, however. “The frequency of discussion and updating of various risk models had been increasing over the last three to six months due to energy, aluminium and grain price risk. As we closely follow developments in Ukraine, risk management discussions are taking place even more regularly.”

Rocketing prices have also underscored the importance of the firm’s hedging policies, where it seeks to hedge a percentage of the commodity exposures for up to four years. “The long-term hedging programme we have in place has helped to mitigate a direct impact from these material price increases,” says Buchanan.

Shipping

Companies striving to meet customer demand amid tight supply, and mitigate the risk of supply chain disruption, can also find support in robust business continuity strategies that equip them for exception handling. Acting quickly depends on being able to share up-to-date information at the right time and in the right way, according to the Digital Container Shipping Association (DCSA), a non-profit, independent organisation established by several of the largest container shipping companies.

Shipping is about more than transportation. It is about asset management, according to the DCSA. “Whatever the cause, disruptive events in the supply chain have two things in common. They take a lot of effort to resolve and managing them requires good data.”

That data should comprise proactive delay notifications to help shippers and others adapt to the unexpected by making alternative operational plans. High-quality data also requires a common data language and process framework based on shared requirements. With that, communication works for all stakeholders in the supply chain regardless of carrier, technology platform or route. Global information exchange helps mitigate the risk of supply chain disruption but it takes collaboration, says the DCSA. “Vendor-agnostic industry standards help smooth the transit of goods through the supply chain through digitised end-to-end documentation and standardised track and trace.”

Tougher ahead

Companies are battening down for access to their raw materials to get much tougher ahead. Conflict in Europe’s breadbasket risks a crisis for global food supply, said Svein Tore Holsether, President and CEO of Yara International, one of the world’s biggest fertilizer companies, in a recent statement. Russia and Ukraine account for just under 30% of global wheat exports and send grain to countries in the Middle East, north Africa and Asia. Since the start of February, wheat prices have risen 60%.

Many Ukrainian farmers have been recruited to fight and fertilizers are in short supply (sanctioned Belarus is one of the world’s largest producers of potash, a component of fertilizer) threatening this year’s spring planting and next year’s yields. “The most extreme calculations indicate that if fertilizer is not added to the soil, the crops can be reduced by 50% by the next harvest,” says Tore Holsether.

Oil and gas

Western sanctions on Moscow have directly avoided natural resources, which in theory leaves them available for trade. However, banks, insurers and shipping companies are increasingly boycotting the country to reduce legal and reputational risk. Now talk of a western embargo on Russian oil and gas exports has sent the price of oil and gas shooting even higher.