Expanding horizons
August 1st 2007

Once you start to risk manage your energy market exposure, it suddenly becomes apparent how many other things in your supply chain are linked to energy costs in one way or another. In this article we shall consider the opportunities where you can apply the risk management techniques you are adopting with your energy portfolio to different markets. In order to help place these opportunities in some kind of logical order we have grouped them based on how closely related they are to your current gas and electricity purchasing activity

Level 1: Incremental Risks These risks are associated with the procurement of other energy related products where your organisation has its own direct and physical exposures to the commodity.

It is now possible to apply risk management techniques to the following commodities and obtain the same level of control and opportunity as currently enjoyed with Electricity and Gas:

EU-ETS Emissions DERV / Petrol Ethanol Heating Oil Fuel Oil

Level 2: Feedstock Risks These risks are associated with the procurement of products to which your organisation has a physical exposure and where energy is a large component of the feedstock cost. Typically you can either directly index the price for these products to energy or these products are traded in their own right:

Ammonia Fertilizer Polymers Aluminium Glass

Level 3: Substitute Risks As the growth in demand for biofuels is increasing, so the supply / demand balance for other commodities is fundamentally shifting, in particular the soft agricultural commodities.With these being the feedstock for a surging bio fuel demand, the risk management of these soft commodities is becoming increasingly complicated. But once again it is possible for your organisation to directly risk manage its exposure to:

Wheat Corn Soya

Level 4: Embedded Risks These risks occur when suppliers seek to index their price in whole or in part to energy, even though the product doesn't have energy as its primary feedstock cost. Again where this occurs the exposure can be risk managed:

Transport and Freight Contracts Refrigeration and chilled storage contracts Packaging Contracts Paper and Plasterboard contracts

Level 5: Associated Risks After a while the control and security offered by a risk management approach to procurement can become addictive and you will start to consider other exposures you have that can utilise the same technique. Other markets where a risk management approach to procurement can be applied are:

Paper Pulp Coffee Cocoa Metals

Your effectiveness and ability to add value to your organisation is greatly increased once you start thinking about the way in which a robust measurement and control process with a considered risk management strategy will help you to take a strategic view on the savings / cost avoidance you are going to deliver to your business this year.

All you need to do is identify which items in your procurement portfolio can be risk managed and what the relationships of these risks have to the other items you procure before creating a process to strategically manage them all.

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