It is no surprise that we have seen big shifts in commodity prices for oil, iron ore, base metals and steel over the last few years. After all, markets are volatile, right? What IS a little surprising, though, is that steel price volatility has been particularly sharp (see below) recently.
When I talk about building a diversified hedging portfolio as a business, I often use the analogy of building an investment portfolio as an individual.
With an individual investment portfolio, a mix of different, non-correlated asset classes (i.e., stocks, bonds, etc.) is used by wealth management advisers to minimize risk and maximize long-term results—no matter if it’s a bull or bear market.
For the last 20-plus years, the term “VaR” has been used fairly frequently at big banks across the world. That’s because banks have been using VaR (value at risk) as a statistical tool to proactively manage risk for their clients for decades.
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.
Commodity markets are facing many challenges today with oversupply, low prices and uncertainties, making managing price risk a critical skill for financial professionals. The 2016 AFR Risk Survey from the Association of Financial Professionals revealed commodity prices are one of the top drivers for earnings uncertainty across industries.
The metals market is moving fast and it is become more complex than ever. Recently, many banks and brokers have been exiting the metals space or reducing their presence. This is due to increased regulations and costs. Needless to say, this movement adds to the complexity of this market.