COMMODITY RISK MANAGEMENT

Andrew Boyce

Head of Structured Trade & Commodity Finance, Australia & New Zealand

Finance & Treasury Association – 29th Annual Conference – 16-18 November

Classification: Public

COMMODITY RISK MANAGEMENT – SETTING THE SCENE

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100015002000250030003500

LME Aluminium

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2000

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LME Copper

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140

11/3/2013 11/3/2014 11/3/2015

Iron Ore Platts Netback FOB Aus 62% Fe

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100150200250300350400450

Peak Downs Coking Coal FOB Aus

COMMODITY RISK MANAGEMENT – SETTING THE SCENE

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5

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25

4/1/2014 4/1/2015 4/1/2016

Sugar No.11 FOB Aus

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100150200250300350

ASX Wheat

020406080

100120140160

Brent Crude USD/bbl

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250.0

4-Aug

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4-Aug

-15

Thermal Coal FOB Newcastle

COMMODITY RISK MANAGEMENT – SETTING THE SCENE

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2016

Eastern Young Cattle (¢/kg cwt)

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200

400

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1,000

1,200

1,400

Steel Making - major inputs and ouputs

Hard Coking Coal & Coke Spot coking coal Peak Downs., Aust US$/tonne fob

Iron Ore CFR China port 62% US$/tonne cfr

Steel Hot rolled coil European domestic US$/tonne exw

Steel Rebar China Domestic US$/tonne

COMMODITY RISK MANAGEMENT - VOLATILITY

COMMODITY RISK MANAGEMENT – EXPECTATIONS OF BANKS

Bank PolicyCompany

Commodity Risk Management

Strategy

Formalisation of Commodity risk Management

Strategy

COMMODITY RISK MANAGEMENT – FORMALISATION

GOVERNANCELEGAL RISKMANAGEMENTRISK MANAGEMENTCOUNTERPARTY RISKFUNDING/LIQUIDITYTRANSPORT/LOGISTICSCOMPUTER SYSTEMS/MISCONTINGENCIESGENERAL

COMMODITY RISK MANAGEMENT – APPROACHES

HedgableHedged

Hedgable Unhedged Unhedgable

COMMODITY RISK MANAGEMENT – EXAMPLE – IRON ORE

1. Purchase Contract2. Off-take Contract

Hedge Provider

3. Commodity Hedge

4. Prepayment

5. Iron Ore Cargoes

Producer Off-Taker6. Export Proceeds

7. Credit/Debit under Commodity Hedge

8. Sales Surplus

COMMODITY RISK MANAGEMENT – EXAMPLE – BEEF CATTLE

2014 360c/kg cwt$468 / head

2016 725c/kg cwt$943 / head

InventoryHerd number 20,000Average weight 460EYCI 6.5Dressing percentage 52%Market value $31,096,000 Adv 70% $21,767,200

ReceivablesCurrent $4,147,000 Adv 80% $3,317,600

Availability $25,084,800

THANK YOUPresented by Andrew Boyce