After 20 years, companies are still realizing the benefits of commodity hedging.
Commodity hedging has come a long way in the last 20 or so years. It’s an important function for many corporates in a world where the US dollar, in which most commodities are priced, fluctuates the way it does. But in 1994, companies were just considering it. As International Treasurer wrote in late June, 1994:
Many companies manage commodity price risk through product substitution and energy conservation without considering the benefits of financial hedging techniques. They do so despite the fact that many of the derivative hedging techniques they use to manage FX and interest rates risk can also be applied to commodity price risk.
Still, according to 2013 study by Chatham Financial only about half of companies with interest-rate, FX or commodity exposures use derivative hedges.
But the truth is there are competitive advantages realized by companies that hedge the price risks of their commodity purchases. And after the 2008 financial crisis and rising commodity prices, many companies saw it as a necessity. Unfortunately regulations might push companies back toward no hedging; that’s because many bank counterparties are pulling out of the commodity business amid new regulations requiring them to hold more capital. This is leaving only a handful of players; however, hedge funds and physical traders will likely pick up the slack.