From rock face to recycling, metal price risk education is core to our work. Our industry-recognized trainers speak from deep hands-on experience.
Concepts
Every business function requires an operating foundation. Price risk management is no different. Six essential building blocks need to be in place for the function to fully perform: structure, goals, control, benchmarks and standards, measurement and visibility. As every business is unique, they must be fitted and aligned in order to weave the function into the fabric and culture of the business and ensure that the best results are achieved.
Structure
A structure that manages distinct risks separately.
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Every processor, whether upstream or down, is a manufacturing added-value enterprise wrapped around a commodity trading business.
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Manufacturing objectives are completely different from trading, so why lump their results together?
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Structure should isolate distinct risks to facilitate explanation and lead to actions to improve performance
Goals
Well-defined goals provide clear direction and align functional teams.
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Are opportunities with risk avoided or optimised? Do departments work to a common end? Are goals clear and understood?
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Alignment between function and risk management goals is fundamental
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Goals must be realistic. “Zero price risk” is probably impossible
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Goals must be explainable to make them tangible for the front line
Control
Control begins with oversight and guidance defined in clear policies and visible control systems.
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Cross-functional Risk Committees widen understanding and drive a common risk agenda.
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Control requires that risks and their interrelationships are planned for.
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Systems facilitate control through reporting, duty segregation, limit monitoring, double checks and signoffs.
Benchmarks & Standards
Conformance to standards and benchmarks ensures risk management meets stakeholder demands.
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Standards satisfy the expectations of shareholders and the demands of your auditors.
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Standards are not optional. They are imposed by auditors, bankers and regulators, not to mention shareholders, but where is the manual for price risk management?
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Standards set in many departments impact price risk management. The risk function should not be forgotten when standard setting is done.
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Standards are often inexact. Many derive from industry practice or “expedient inexactitudes”. Risk managers need to be aware.
Benchmarking means monitoring and evaluating how close you get to standards.
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Benchmarking protects reputations. It’s easier to learn from others’ mistakes
Measurement
Measure commercial and risk management outcomes on a combined net basis.
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Does your system for measuring financial risk offer clear and explainable outcomes for your risk management function?
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Measurement must link the results of commercial pricing with offsetting financial hedge transactions and present them on a combined net basis.
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Exposures must be defined in pricing terms. Commercial systems are typically where the data resides.
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Measurement must be presented in both volumetric and financial terms.
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Measurement systems should expose inefficiencies and their sources.
Visibility
Visibility leads to increased accountability, improved process and reduced fire-fighting.
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Concise reporting clarifies the magnitude of price risk and the success of actions taken to mitigate it.
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Reporting must show a full picture which expose weaknesses.
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Knowledgeable employees are essential. Training is a must.
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Planning must include risk improvement targets and progress reporting.