Commodity Risk Diagnostic & Advisory

Commodity risk, translated into decisions.

CommodityAdvisor helps companies identify and quantify their commodity exposures and decide how those risks should be managed.

The analysis follows the exposure from physical purchases and commercial contracts through to margin, cash flow, working capital and liquidity. Existing hedges, customer pass-through mechanisms, timing differences, basis risk and collateral requirements are included where relevant.

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The management question

The gross purchase volume is rarely the actual risk.

Commodity exposure is often distributed across procurement, sales, finance and operations. Purchase prices may change immediately, while customer prices are adjusted later. Inventory can increase working-capital requirements. A financial hedge may reduce earnings volatility while creating collateral or margin requirements.

CommodityAdvisor establishes the company’s net economic exposure and shows how it can affect financial performance and liquidity over time.

  1. Physical purchases and consumption
  2. Supplier and customer contracts
  3. Pass-through and timing
  4. Existing hedges
  5. Net exposure
  6. EBITDA, cash flow and liquidity
Exposure assessment

From physical flow to financial impact.

Physical exposure

Commodity volumes, consumption patterns, inventory, seasonality and expected changes in the underlying business activity.

Pricing mechanisms

Reference indices, currencies, pricing dates, contractual lags, optionality and differences between physical prices and available hedge instruments.

Commercial pass-through

The extent and timing of price adjustments in customer and supplier contracts and the margin exposure remaining with the company.

Existing hedges

Physical and financial hedges, hedge periods, instruments, counterparties and the risks that remain after hedging.

Financial impact

Sensitivity of margin, EBITDA, cash flow, working capital and liquidity under relevant price and volume scenarios.

Governance

Risk appetite, mandates, decision rights, limits, controls, reporting and the operational ability to implement the recommended approach.

How it works

A focused process leading to a management decision.

  1. Scope

    Confirm the business question, material commodities, entities, time horizon and required management decisions.

  2. Map

    Review physical flows, commercial contracts, pricing mechanisms, existing hedges and relevant responsibilities.

  3. Quantify

    Calculate the net exposure and its potential effect on earnings, cash flow, working capital and liquidity.

  4. Assess

    Evaluate risk capacity, commercial alternatives, procurement responses, hedging options and governance requirements.

  5. Recommend

    Present the management recommendation, decisions required and a prioritised implementation plan.

Economic impact

The same price movement can affect earnings and liquidity differently.

CommodityAdvisor distinguishes between the accounting impact, the underlying cash flow and the liquidity required to support the company’s contracts and hedges.

Depending on the exposure, the analysis can include

  • Open exposure by commodity and period
  • Price and volume sensitivities
  • Relevant historical and forward-looking stress scenarios
  • EBITDA-at-Risk
  • Cash-Flow-at-Risk
  • Working-capital impact
  • Margin and collateral requirements
  • Basis, currency and volume risk
  • Counterparty and concentration risk
The purpose is to show not only how much the company can lose, but how the exposure reaches the income statement, cash flow and available liquidity.
Available responses

Hedging is one option, not the starting point.

The recommended response depends on the economics of the exposure, the company’s risk capacity and its ability to implement and govern the solution.

Accept the risk

Retain the exposure where it is understood, proportionate and within the company’s financial capacity and risk appetite.

Change commercial terms

Adjust price clauses, pass-through mechanisms, contractual lags, minimum margins or the allocation of price risk between the company and its customers or suppliers.

Change procurement or operations

Change purchasing periods, supplier structures, inventory, raw-material alternatives or the timing of operational decisions.

Hedge the exposure

Use physical contracts or financial instruments where they provide an effective and operationally sustainable reduction of the underlying risk.

Each alternative is assessed against expected risk reduction, cost, basis risk, liquidity, accounting implications, counterparty exposure, operational complexity and governance requirements.

What management receives

Analysis that ends with decisions and ownership.

Executive Commodity Risk Report

A management-level assessment of the material exposures, financial impact, current protection, gaps and decisions required.

Commodity Exposure Model

A structured model covering volumes, pricing mechanisms, net positions, sensitivities, scenarios and the effect of alternative responses.

Risk and Governance Assessment

An assessment of policy, risk appetite, mandates, limits, controls, reporting, systems and responsibilities.

Implementation Roadmap

A prioritised plan setting out actions, owners, dependencies and timing.

Initial engagement

A defined diagnostic before a larger implementation.

A typical CommodityAdvisor diagnostic is structured over three to five weeks, depending on scope, data availability and organisational complexity.

Where further work is required, the engagement can be extended to include hedging policy, contract design, counterparty selection, transaction support, reporting, systems and hands-on implementation.

The initial scope can include

  • Up to three material commodities
  • One company or a consolidated group perspective
  • A 12–24 month exposure horizon
  • Base case, sensitivity and relevant stress scenarios
  • Interviews with management and selected business functions
  • A management workshop
  • Final report and implementation plan

The final scope is agreed with the client.

Relevant situations

When CommodityAdvisor creates value.

CommodityAdvisor is designed for companies where commodity prices have a material effect on earnings or cash flow, but where the exposure is fragmented across procurement, sales, finance and operations.

  • Management lacks a consolidated view of the company’s net commodity exposure
  • Raw-material or energy prices are causing unexpected margin volatility
  • Customer pass-through mechanisms do not match procurement pricing
  • The company is considering a new hedging programme
  • Existing hedges are not clearly linked to the underlying exposure
  • Collateral or margin requirements create liquidity concerns
  • The board or management needs clearer risk reporting
  • Responsibilities and decision rights are unclear
  • The company wants an independent assessment before engaging banks, brokers or commodity suppliers
TREC Advisory

Independent advice across the full exposure.

CommodityAdvisor combines commercial understanding, financial risk management, treasury, liquidity and governance.

TREC Advisory does not begin with a preferred instrument or product. The analysis begins with the company’s business model and follows the exposure through contracts, financial performance, cash flow and implementation.

The recommendation is based on what the company needs, what it can financially support and what it can operate and govern in practice.

CommodityAdvisor

Do you know what a material commodity price movement would mean for your margin, cash flow and liquidity?

We can establish the net exposure, quantify the financial impact and identify the decisions management should take next.

Discuss your exposure

TREC Advisory · Treasury · Risk · Energy · Commodities · Finance & Governance