Commodity markets under pressure

Persistently high prices and significant volatility in commodities such as copper and other industrial metals, crude oil and petroleum products, precious metals, agricultural commodities, electricity and gas directly affect procurement costs, margins and liquidity requirements at German industrial companies. Corporate treasury therefore needs to reliably identify the company’s commodity exposure and quantify the short-term impact on liquidity and funding. Working with commodity procurement, treasury should assess how physical procurement measures and derivative financial instruments can be combined in a balanced hedging strategy aligned with the company’s key performance metrics.

The impact varies by industry, commodity, procurement structure and business model. High copper prices, for example, increase the cost of metal-intensive intermediate products, while price movements in crude oil and distillates primarily affect production, transportation and logistics costs. Prices for precious metals, electricity and gas can also fluctuate significantly due to geopolitical developments, supply constraints and infrastructure limitations. As a result, planning assumptions become unreliable more quickly. At the same time, liquidity and funding requirements may increase, placing greater pressure on credit facilities, trading lines and counterparty limits.

Corporate treasury should begin by reassessing the impact on liquidity, funding and cash flows. Derivative financial instruments can be used to limit all or part of future price risk. Depending on the company’s risk profile, suitable instruments may include over-the-counter forwards and swaps, exchange-traded futures and options. Forwards, futures and swaps allow companies to largely lock in prices. In return for a premium, options provide protection against adverse price movements while preserving the opportunity to benefit from favorable developments. Instruments should be selected based on the nature, size and timing of the exposure. Treasury should also consider potential variation margin payments, collateral requirements, counterparty risk and available funding capacity.

Derivative financial instruments only reduce commodity price risk effectively when the underlying transaction and hedging instrument are sufficiently aligned from an economic perspective. In addition to price risk, companies must consider volume, basis, currency, liquidity and counterparty risks. Basis risk arises, for example, when the quality, delivery location, reference price or maturity of the physical transaction differs from that of the selected derivative. This is particularly common with petrochemical products and agricultural commodities. Companies should also avoid overhedging when demand forecasts are uncertain. Given the substantial changes in derivative fair values that can result from sharp commodity price movements, qualifying hedging relationships and their accounting treatment should be structured to appropriately manage the effects on earnings, equity and key performance indicators.

The starting point should be a consistent, company-wide record of physical commodity positions and existing derivative hedges. This is particularly complex for international companies whose subsidiaries operate independently. Relevant factors include expected procurement volumes, contractually fixed prices, inventories, natural hedges, applicable price indices, currency effects and maturities. This information can be used to determine the open economic exposure and subsequently select suitable instruments and hedge ratios. Depending on the accounting treatment of derivatives, hedge accounting requirements and the own-use exemption may also need to be considered.

Corporate treasury should also assess whether existing reporting provides an appropriate and reliable view of gross and net exposures, hedge ratios, maturity profiles, fair values and the impact on liquidity and limits. Sensitivity analyses, scenarios and metrics measuring the economic effectiveness of hedging may provide additional insight. This information enables the company to prioritize actions and coordinate decisions across commodity procurement, risk management, controlling and accounting.

The required information is usually available, but it is often distributed across legal entities, locations and systems. Heterogeneous data sources, different planning horizons and inconsistent definitions of volumes, materials and prices make consolidation complex and time-consuming. For ongoing management purposes, companies should capture short-term production and procurement requirements, inventories, longer-term sales and procurement plans and relevant intragroup transactions in a standardized data set. Timeliness, completeness, traceability and an appropriate level of detail are essential for reliably quantifying risk positions.

This data foundation allows corporate treasury to continuously monitor commodity exposures, hedge ratios, the fair values of derivative financial instruments and their impact on liquidity and limits. It also provides transparency into potential variation margin and collateral requirements and supports the alignment of hedging transactions with liquidity planning, funding capacity and counterparty limits. Data on demand and procurement typically comes from procurement and operational planning. Risk management, controlling and accounting provide additional information on risks, planning, valuation and accounting. Integrating this information from both a technical and functional perspective often remains challenging.

This foundation also enables the regular update of sensitivity analyses, stress tests and rolling forecasts. These analyses show how changes in prices, volumes, currencies or liquidity affect open positions, cash flows and hedging requirements. Companies can therefore evaluate alternative procurement and hedging measures more effectively, particularly in response to sharp price movements, changing demand or limited market liquidity. At the same time, they can reduce the manual effort required to prepare and reconcile data.

Integrated data and analytics solutions are already well established in some sectors, including energy trading. Given current market conditions, they are also becoming increasingly important for commodity-intensive industrial companies. These solutions improve the timeliness and traceability of management information and support corporate treasury in liquidity planning, risk reporting and hedge monitoring. Commodity procurement remains responsible for purchasing decisions, but a consistent information base enables closer coordination with treasury.

Current market conditions highlight the importance of reliable transparency into physical commodity positions, existing hedges and their impact on liquidity, funding and limits for companies in commodity-intensive industries. Corporate treasury should therefore work with commodity procurement, risk management, controlling and accounting to assess whether the existing data foundation, reporting and hedging strategy remain appropriate in light of changing price and volatility conditions.

The targeted use of forwards, futures, swaps or options can limit price risk and improve the predictability of procurement costs, margins and cash flows, provided that instruments, hedge ratios and maturities are aligned with the economic exposure. Given the high degree of market uncertainty, companies should promptly review their existing positions and hedging measures, prioritize identified adjustments and implement the required actions.