Metal prices have always been notoriously volatile due to the dynamics of supply, demand, and other market forces. But recent years have seen extraordinary metal price swings leaving metals companies exposed to higher risks. For example in H1 2022 alone, nickel prices doubled in a matter of days on the LME amid supply concerns, while iron ore fell over 30% from March to July 2022. No metal seems immune from price volatility today.
For metals companies, volatile prices can wreak havoc on profitability and throw business plans off course. So what can metals companies do to navigate price volatility? This is where a powerful commodity trading and risk management (CTRM) solution can make a major difference.
In this blog, we’ll cover:
- How metal price volatility impacts metals companies
- Core risk management strategies to mitigate price risk
- Key features and benefits of a CTRM platform
- Real-world examples of metals firms using CTRM successfully
How Metal Price Volatility Impacts Metals Companies
Metals companies all along the supply chain feel the impact of metal price volatility both directly and indirectly:
- Miners – Revenue and profits swing with metal price changes. High prices don’t always offset rising production costs.
- Smelters – Processing margins get squeezed when metal prices decline but input costs remain high.
- Fabricators – Profitability plummets if metal prices spike while customer contracts are fixed.
- Traders – They take a direct hit on physical or futures positions if prices move against their contracts.
- Distributors – It’s hard to cost-effectively hedge inventory when prices fluctuate wildly.
The bottom line is metal price volatility makes it very difficult for companies to accurately forecast, budget, and optimize on pricing strategies. It can leave significant profit opportunities on the table.
Core Risk Management Strategies
To stay profitable through metal price ups and downs, metals firms need to employ prudent risk management strategies:
- Daily price monitoring – Track prices on LME, COMEX, SHFE and OTC markets to spot trends early.
- Price forecasting – Build price forecast models based on historical data, market fundamentals, and technical factors.
- Hedging – Use futures, options, swaps, and other derivative instruments to lock in pricing for future production or orders.
- Price triggers – Set up automatic pricing alerts and thresholds to flag potential actions.
- Scenario analysis – Run what-if scenario models to quantify risk exposure under different price scenarios.
- Value at Risk (VaR) – Calculate maximum potential loss exposure over a period at a set confidence level.
- Optimization – Leverage linear programming tools to optimize pricing decisions while controlling for price risk.
Mastering these risk management strategies requires having the right technology solution…which brings us to CTRM.
CTRM Capabilities to Master Price Risk Management
A commodity trading and risk management system equips metals companies with specialized tools to execute systematic and robust price risk management:
Market Data & Analytics
- Real-time pricing – Import exchange and index prices via direct connections for spot visibility.
- Charting & modeling – Visually track pricing trends and build forecast models.
- Position management – Centralize physical and futures positions across assets.
- Risk analytics – Assess pricing risk through VaR, scenario analysis, and other methods.
Trading Execution
- Order management – Manage order workflow, execution, and confirmations.
- Position keeping – Track futures, options, and OTC derivatives positions.
- Auto-execution – Configure pricing triggers and thresholds to auto-execute hedges.
- P&L tracking – Calculate realized and unrealized P&L on open positions.
Risk Management
- Hedging – Hedge physical price exposure via futures, options, swaps, collars, etc.
- Credit limits – Define counterparty credit limits and monitor exposure.
- Policy compliance – Ensure trading activity aligns with company hedging policies.
- Treasury integration – Incorporate bank accounts, credit lines, FX, and payments.
Reporting
- Risk reports – Produce reports on VaR, stress tests, counterparty exposure, and more.
- Trader reports – Daily trader P&L, positions, and limit monitoring.
- Auditing – Maintain audit trail of all pricing activities.
- Regulatory compliance – Ensure compliance with EMIR, Dodd-Frank, REMIT regulatory requirements.
A CTRM system centralizes the data, analytics, and tools to gain a holistic view of price risk so metals firms can trade confidently.
CTRM Success Stories
Let’s look at a couple real world examples of metals companies reaping major benefits from deploying CTRM systems:
Glencore – The global commodity trading firm implemented a CTRM platform to consolidate multiple regional systems into a single centralized system. It provided a consistent view of real-time market data and positions globally while also improving regulatory compliance.
Reliance Steel & Aluminum – The metals service center and trader implemented a CTRM platform to optimize its hedging strategies as metal price volatility increased. The improved hedging helped offset significant price fluctuations.
So whether it’s a mining giant or an independent metal trader, CTRM solutions have proven their value in times of high metal price volatility.
Conclusion
Metal price volatility is here to stay, which makes a CTRM system essential for metals companies to control price risk. By centralizing market data, positions, risk analytics, trading, hedging, and reporting on one platform, metals companies can finally master price volatility rather than be victimized by it. The time is now to evaluate quality CTRM solutions that can deliver millions in cost savings and profit growth over the long run.
As seasoned CTRM experts, we partner with metals companies to implement, configure and customize robust CTRM systems tailored to their unique price risk management needs.
Contact Nebular Cross today to learn more about how our targeted CTRM consulting services can benefit your organization.
