For decades, metals, energy, softs or grain market risk has been hedged through standard tools such as futures and options, and have been enough to shield businesses from market volatility. But in today’s complex markets – where macroeconomic pressures, geopolitical issues, capital flows and currency fluctuations can cause dramatic swings, these basic types of hedging strategies may not be enough.
Each day, risk management professionals have more choices and opportunities to design tailored solutions, customized to specific volumes and shipment dates. And as a proactive risk strategy is being built, the right combination and diversification of pricing tools should minimize uncertainty and maximize opportunity.
Diversification also requires that strategies used to build a price risk management portfolio must be complementary – their outcomes need to be different and non-correlated to ensure success, regardless of market volatility. Proactive and disciplined strategies are sounder than reactive ones. Otherwise, you could be sitting on the sidelines, hoping for the markets to change while having a mining operation to run with fixed and variable costs on the line.
Recently, I met a risk manager at a mining company that looked to sell relative to a market which trades below its desired budget or pricing level. Just a few years ago, this company would have had limited pricing options with no flexibility in timing, volume or market bias. Today, there are tailored solutions with an opportunity to sell at more favorable levels or receive compensation through a structured product, while waiting for the markets to move.
No one has control over where the markets are today or are going tomorrow. But you can take control to design a sound, proactive, and diversified risk management strategy that is aligned with your company’s declared objectives.