A common misconception is that at times of historical peaks and troughs there is never going to be someone buying and someone selling.
For example, were there companies buying oil in 2008 at $147 per barrel in the summer of 2008? Answer, absolutely there were. Why? Because either they thought it was going higher (projections suggested over $200 a barrel) or they were hedging it against something else.
Was it a good trade or not? Only the traders buying it or selling it will be able to tell you, based on individual circumstances and how it played out.
Take the current EU ETS carbon price. Is it good value at the current level of 62.31 euros a tonne? Well, it is a higher price for a buyer than it was two weeks ago at 56.54 euros per tonne, and trading at record highs for a seller; but, as we said before, this is only half the story.
Anyone can look at history and tell you what happened, but it’s much harder to forecast what will happen in an uncertain future. Welcome to hindsight trading.
What you can do is forecast what impact certain scenarios have on your business, which will make the overall decision-making process far easier.
Ask yourself when does the price become too painful to handle or too good to be true?
As you start to build this picture you will quickly realise the importance of understanding your unique position. You will realise this isn’t just about ‘playing the markets’ to lock in a commodity price. It’s more than likely to be about a hedge against something else. If one is fixed and one is variable, you need to make sure they are managed in line with each other.
Below are some examples of why your commodity hedging strategy needs to be aligned to other areas of your business to reduce exposure, not increase it:
As we have shown, in the examples above and price inflation over the last year, price hedging is a complicated process, but it doesn’t have to be that way.
Sure, it’s easy to slip into one of two worlds: never knowing you are exposed to volatility before it’s too late; or being paralysed with the fear of making a wrong decision and doing nothing.
However, do it right and you will feel in control of the ‘bull’ or the ‘bear’ (a falling market) and you will be able to make calm and considered decisions which set your business on the right track.
If you would like to talk to the edenseven team on how to manage your exposure to global commodity markets, enabling your organisation to achieve its true potential, please contact us at edenseven.co.uk.
5 High Green,
Cambridge, CB22 5EG
+44 (0)1223 750335
Suite 507/508
32 Threadneedle Street
London
EC2R 8AY
2 rue Paul Borel
75017, Paris
+44 (0)1202 045532
14 Abba Hillel Silver Road
Ramat Gan
Israel 5250607